Accuray
Annual Report 2011

Plain-text annual report

Use these links to rapidly review the documentTABLE OF CONTENTS Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA PART IVTable of ContentsUNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549FORM 10-KCommission file number 001-33301ACCURAY INCORPORATED(Exact name of registrant as specified in its charter)DELAWARE(State or Other Jurisdiction ofIncorporation ororganization) 20-8370041(I.R.S. EmployerIdentification No.)1310 Chesapeake TerraceSunnyvale, California 94089(Address of Principal Executive Offices) (Zip Code)Registrants' telephone number, including area code: (408)716-4600 Securities registered pursuant to section 12(b) of the Act:Title of Each Class Name of Each Exchange on Which RegisteredCommon Stock, $.001 par value pershare The NASDAQ Stock Market LLCSecurities registered pursuant to section 12(g) of the Act:None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No  Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No  Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of(Mark One)  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934For the fiscal year ended June 30, 2011oro TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 19341934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes  No o Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data Filerequired to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for suchshorter period that the registrant was required to submit and post such files). Yes o No o Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained,to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K. o Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reportingcompany. See definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Checkone): Indicate by check mark whether the registrant is a Shell Company (as defined in Rule 12b-2 of the Exchange Act). Yes o No  The aggregate market value of the registrant's common stock held by non-affiliates of the registrant based on the last sale price for such stock onDecember 31, 2010, the last business day of the registrant's most recently completed second fiscal quarter was: $247,204,568. Shares of the registrant'scommon stock held by each executive officer, director and 5% stockholder have been excluded in that such persons may be deemed to be affiliates. Thisdetermination of affiliate status is not necessarily a conclusive determination for other purposes. As of August 31, 2011, the number of outstanding shares of the registrant's common stock, $0.001 par value, was 70,328,826.DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement for the Registrant's 2011 Annual Meeting of stockholders are incorporated by reference in Part III of thisForm 10-K.Large accelerated filer o Accelerated filer  Non-accelerated filer o(Do not check if asmaller reporting company) Smaller reporting company oTable of ContentsACCURAY INCORPORATED YEAR ENDED JUNE 30, 2011 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS 2 PART I Item 1. Business 3 Item 1A. Risk Factors 34 Item 1B. Unresolved Staff Comments 69 Item 2. Properties 69 Item 3. Legal Proceedings 70 Item 4. (Removed and Reserved) 73 PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases ofEquity Securities 74 Item 6. Selected Financial Data 75 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 78 Item 7A. Quantitative and Qualitative Disclosure About Market Risk 94 Item 8. Financial Statements and Supplementary Data 96 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 140 Item 9A. Controls and Procedures 140 Item 9B. Other Information 144 PART III Item 10. Directors, Executive Officers and Corporate Governance 144 Item 11. Executive Compensation 145 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related StockholderMatters 145 Item 13. Certain Relationships and Related Transactions, and Director Independence 145 Item 14. Principal Accountant Fees and Services 145 PART IV Item 15. Exhibits and Financial Statement Schedules 146 Signatures 157 Table of ContentsSPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This Form 10-K includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, andSection 21E of the Securities Exchange Act of 1934, as amended, including, but not limited to, statements regarding the extent and timing of futurerevenues and expenses, statements regarding reimbursement rates, statements regarding regulatory requirements, statements regarding futureorders, statements regarding the cancer treatment market, statements regarding our strategy, statements regarding our strategic alliance withSiemens AG, statements regarding our products, statements regarding revenues, statements regarding intellectual property rights, statementsregarding the acquisition of TomoTherapy, (including our expected timing for the acquisition to be accretive), statements regarding our earnings orother financial results, and other statements using words such as "anticipates," "believes," "could," "estimates," "expects," "forecasts," "intends,""may," "plans," "projects," "should," "will" and "would," and words of similar import and the negatives thereof. Accuray Incorporated ("we," "our,"the "Company") has based these forward-looking statements largely on our current expectations and projections about future events and financialtrends affecting the financial condition of our business. Forward-looking statements should not be read as a guarantee of future performance orresults, and will not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. These forward-looking statements speak only as of the date of this Form 10-K and are subject to business and economic risks. Factors that could cause our actualresults to differ materially include those discussed under "Risk Factors" in Part I, Item 1A of this report. We undertake no obligation to update orrevise any forward-looking statements to reflect any event or circumstance that arises after the date of this report.PART I On June 23, 2009, our Board of Directors determined to change our fiscal year end to June 30, beginning with fiscal 2010. Prior to that, throughfiscal year 2009, our fiscal years ended on the Saturday closest to June 30th, so that in a 52 week period, each fiscal quarter consisted of 13 weeks.The additional week in a 53 week year was added to the fourth quarter, making such quarter consist of 14 weeks. Fiscal year 2009 was comprised of52 weeks. For ease of presentation purposes, we refer to June 30 as our fiscal year end.Item 1. BUSINESS The Company We, Accuray Incorporated, believe we are the premier radiation oncology company based on our history of rapid innovation and our leading edgetechnologies designed specifically to deliver radiosurgery, stereotactic body radiation therapy, intensity modulated radiation therapy, image guidedradiation therapy, and adaptive radiation therapy that is tailored to the specific needs of each patient. Our suite of products includes the CyberKnife®Robotic Radiosurgery System and the TomoTherapy® System. The systems are highly complementary offerings, serving distinct patient populationstreated by the same medical specialty. The CyberKnife System represents the next generation of dedicated radiosurgery systems. With its specialized tracking and robotic correctingcapabilities, it is able to deliver ablative doses of radiation with a high level of accuracy. The CyberKnife System is designed to combine continual imageguidance technology with a compact linear accelerator, or linac, which has the ability to move in three dimensions according to the treatment plan. Ourimage-guided technology enables the CyberKnife System to continually acquire images to track and detect a tumor's location and movement and transmitany position corrections to the robotic arm prior to delivery of each dose of radiation. Our CyberKnife linac is a compact radiation treatment device thatuses microwaves to accelerate electrons to create high-energy X-ray beams to destroy tumor cells. This combination of image-guided technology andlinac, which we refer to as intelligent robotics, extends the benefits of radiosurgery to the3Table of Contentstreatment of tumors anywhere in the body. The CyberKnife System automatically tracks, detects and corrects for tumor and patient movement in real-time during the procedure, enabling delivery of precise, high dose radiation with sub-millimeter accuracy. Treatment with the CyberKnife Systemrequires no anesthesia, can be performed in one to five staged treatment sessions, or fractions, on an outpatient basis and allows for the treatment ofpatients who otherwise might not have been treated with radiation or who may not have been good candidates for surgery. In addition, the CyberKnifeSystem is designed to minimize many of the risks and complications that are associated with other treatment options. With the ability to offer a full range of treatment options, the versatile CyberKnife® VSI™ System uses intelligent capabilities to not only enableexpert-level treatments with an intuitive planning process, but also to adapt treatment delivery providing the flexibility to optimize treatments for theunique needs of each patient. A comprehensive set of tools and ready integration into existing institution infrastructure and a logical workflow make theCyberKnife VSI System simple and convenient in daily clinical practice. A determination of when it may or may not be appropriate to use theCyberKnife System for treatment is at the discretion of the treating physician and depends on the specific patient. However, given the CyberKnifeSystem's design to treat focal tumors, the CyberKnife System is generally not used to treat (1) very large tumors, which are considerably wider than theradiation beam that can be delivered by the CyberKnife System, (2) diffuse, wide-spread disease, as is often the case for late stage cancers, because theyare not localized (though the CyberKnife System might be used to treat a focal area of the disease) and (3) systemic disease, like leukemias andlymphomas, which are not localized to an organ, but rather involve cells throughout the body. The treatment systems available within our TomoTherapy radiation therapy platform operate on a ring gantry and combine integrated computedtomography, or CT, imaging with intensity modulated radiation therapy, which is designed to deliver radiation treatments with speed and precisionwhile reducing radiation exposure to surrounding healthy tissue. The products include the Hi-Art® System, delivering CT-guided, helical, intensity-modulated radiation therapy, or IMRT; the TomoHD™ System, which includes both our TomoHelicalTM and TomoDirectTM treatment modalities; andthe TomoMobile™ relocatable radiation therapy solution, which consists of a standard TomoTherapy System, housed in a movable coach that replicatesthe environment of a conventional treatment vault and is designed to improve the access and availability of state-of-the-art cancer care. We refer to thesesystems collectively as the TomoTherapy Systems. As of June 30, 2011, 240 CyberKnife Systems were installed, four of which are pursuant to our shared ownership program: 146 in the Americas,61 in Asia and 42 in Europe. Also as of June 30, 2011, 342 TomoTherapy Systems were installed worldwide, with 207 in the Americas, 74 in Europeand 61 in Asia. CyberKnife and TomoTherapy customers have reported that more than 200,000 patients have been treated in 32 countries with oursolutions since their commercial introductions. Our customers have increasingly used the CyberKnife System for indications outside of the brain, whereradiosurgery treatments first originated, for tumors on or near the spine and elsewhere in the body, for example, in the lung, liver, prostate, pancreas andkidney. Based on customer data, over 50% of patients treated with the CyberKnife System in the United States during the year ended June 30, 2011were treated for tumors outside of the brain. We were incorporated in California in 1990 and commenced operations in 1992. We reincorporated in Delaware in 2007. On June 10, 2011, wecompleted the acquisition of TomoTherapy Incorporated ("TomoTherapy"), a creator of advanced radiation therapy solutions for cancer care, byacquiring all of the common stock of TomoTherapy in exchange for cash and shares of our common stock. TomoTherapy is now a wholly ownedsubsidiary of Accuray. Our principal offices are located at 1310 Chesapeake Terrace, Sunnyvale, CA 94089, and our telephone number is (408) 716-4600.4Table of ContentsMarket Overview Despite significant improvements in cancer diagnosis and treatment, cancer rates continue to increase globally. According to the World CancerReport issued by the International Agency for Research on Cancer in the World Health Organization, or WHO, annual cancer rates around the world areprojected to increase by over 50% to 26 million new cases in the year 2030, with cancer estimated to be the leading cause of death from 2010 forward.In the United States, cancer is the second leading cause of death, after heart disease. The American Cancer Society, or ACS, estimates thatapproximately 571,000 Americans will die as a result of cancer in 2011. The ACS also estimates that approximately 1.6 million new cases of cancer willbe diagnosed in the United States in 2011, with continued increases in the prevalence of cancer forecasted as the U.S. population ages. Cancers can be broadly divided into two groups: solid tumor cancers, which are characterized by the growth of malignant tumors within the bodyin areas such as the brain, lung, liver, breast or prostate, and hematological, or blood-borne cancers, such as leukemia. The ACS estimates that solidtumor cancers will account for approximately 1.5 million, or approximately 93%, of new cancer cases diagnosed and will account for approximately530,000 cancer related deaths in the United States in 2011. In addition, tumors at the original cancer site, called primary tumors, such as in the breast orprostate, even when diagnosed and treated, can lead to the development of tumors in other locations of the body, called secondary tumors. This isreferred to as metastatic disease, the movement of cancer cells from one part of the body to another. Traditional methods for the treatment of solid tumor cancers include surgery, radiation therapy, chemotherapy and other drugs. Surgery andradiation are forms of local therapy, because the tumor is either directly removed through surgery or irradiated with the objective of destroying thecancer cells comprising the tumor. Chemotherapy is a systemic treatment method which involves the administration of drugs with the objective of killingcancer cells anywhere in the body, and when used in conjunction with local therapy, any remaining cancer cells that were not destroyed by the localtherapy. Currently, the most common type of radiation therapy is external beam radiation therapy, in which patients are treated with high-energy radiationgenerated by medical equipment external to the patient. According to the IMV 2010 Radiation Oncology Market Summary Report, over 85% of patientstreated with radiation therapy in the United States received external beam radiation generated by a linac. Linacs have been widely used for radiationtherapy for over 30 years. Linacs represent the largest product segment within the global radiation therapy equipment market which, according to theOctober 2010 Radiation Therapy Equipment Report by Global Industry Analysts, Inc., totaled an estimated $2.071 billion in 2010. While radiation therapy is widely available in the United States and Western Europe, many developing countries currently do not have a sufficientnumber of linacs to adequately treat their domestic cancer patient populations. According to Global Industry Analysts, the estimated shortfall in radiationtherapy systems for developing countries is estimated to be about 5,000 systems. We believe that increasing demand for advanced medical treatments inmany international markets and growth in cancer incidences worldwide and improvements in the sophistication of radiation therapy techniques willcontinue to drive demand for advanced linacs in the coming years.Radiation Treatment Radiation energy is an effective method for killing cells and is used to treat various cancer types. Radiation therapy works by exposing clusters ofcancer cells, or tumors, to a dose of high energy radiation sufficient to alter their genetic structure, thereby causing cell death. When the external beamradiation therapy process begins, the clinician's goal is to target radiation delivery to the tumor as precisely as possible in order to maximize the radiationdose delivered to cancerous tissue and minimize the exposure of healthy tissue. While the goal of radiation therapy is to selectively deliver5Table of Contentsradiation solely to cancer cells, radiation therapy can result in healthy tissue outside of the intended treatment area being exposed to significant doses ofradiation. Damage to healthy tissue and structures can cause side effects ranging in severity from superficial burns, nausea and vomiting, to moreserious side effects, such as damage to vital organs. Over time, the exposure of healthy tissue to radiation energy can result in accumulated damage tohealthy tissue in the patient's body and limit the patient's future treatment possibilities. In order to reduce such damage and exposure, clinicians typicallydivide the prescribed radiation dose into fractions. Prescribed treatments typically consist of 25 to 35 fractions, and are administered over several weeks.Such fractions are intended to deliver a cumulative dose of radiation sufficient to kill cancer cells, while allowing healthy tissue to recover betweentreatment fractions. Recent advances in radiation therapy technologies have focused clinicians on further improving the ability to target the radiation dose moreprecisely at cancer cells while minimizing the exposure of healthy tissue. These advances include the following:Intensity modulated radiation therapy. Intensity modulated radiation therapy, or IMRT, involves varying, or modulating, the radiation beamintensity across the treatment area. This technique attempts to conform the high dose region of the radiation beam more closely with the shape ofthe tumor, enabling the delivery of higher doses of radiation to tumors with a reduced impact on surrounding healthy tissue. Using IMRT,medical professionals can design a more customized treatment plan for each patient.Image guided radiation therapy. Image guided radiation therapy, or IGRT, involves delivering radiation guided by images of the treatmentarea taken shortly before and/or during treatment using computed tomography, or CT scan, x-ray, ultrasound or other imaging technologies. Bycombining imaging with radiation treatment, clinicians can adjust the patient's position relative to the radiation source prior to each treatment totarget the tumor more precisely. However, the precision and effectiveness of IGRT depends largely on the quality of the images and the degreeto which the radiation delivery system is integrated with the images. Compared to traditional IMRT without image guidance, accurate imageguidance enables clinicians to improve patient outcomes by concentrating higher doses of radiation at tumors and further reducing the exposureof healthy tissue to radiation.Radiosurgery and Stereotactic Body Radiation Therapy. As the ability to precisely target tumors has evolved over the years, the need tofractionate treatment has diminished. Radiosurgery was traditionally defined as an ablative dose of radiation to a tumor. Traditionally, due tolimitations of technology, radiosurgery was confined to intracranial treatment and typically only delivered in a single fraction. Generally, themore radiation dose delivered to a tumor, the greater the possibility of ablating (completely killing) that tumor. Delivery of radiosurgical dosesrequires absolute knowledge of the position of the tumor during treatment and its relationship to surrounding normal healthy tissue. With thedevelopment of frameless radiosurgery, the fields of fractationated radiosurgery (delivery of ablative doses in 2 to 5 fractions) and extracranialradiosurgery, also called stereotactic body radiotherapy (SBRT) developed. Extracranial radiosurgery presents additional challenges becausemany extracranial tumors move due to respiration or other body functions. Radiosurgery originated for tumors in the brain (intracranial).However, depending on the proximity of normal healthy tissue to the tumor, there was a need for fractionated radiosurgery, even intracranially.So, the ability to deliver fractionated intracranial radiosurgery (dividing the prescription dose into one to five fractions) has evolved.Additionally, the same tumor ablation logic has been extended to the treatment of targets anywhere in the body. The same guidelines hold true aswith intracranial radiosurgery. The absolute position of the treatment target in relation to the normal healthy tissue and in relation to the source ofthe radiation must be known. To achieve the accuracy and precision required for both Radiosurgery and Stereotactic6Table of ContentsBody Radiation Therapy, image guidance and a wide range of beam angles are critical for treatment.Adaptive radiation therapy. Adaptive radiation therapy involves adjusting a patient's radiation therapy plan during or between fractions toaccount for changes in the patient's anatomy, the amount and location of the radiation received by the patient, and the size, shape and location ofthe tumor. While there is no widely accepted definition of adaptive radiation therapy, it has been characterized to include as little as an adjustmentto the physical position of the patient relative to the radiation source prior to treatment, as occurs during IGRT, rather than adjustment to thetreatment plan. We believe that adaptive radiation therapy requires monitoring and adjustments to the treatment plan facilitated by both the regularacquisition of updated quantitative images showing the location, size, shape and density of the tumor, as well as verification of the radiation dosereceived by the patient throughout the entire course of treatment.Dose escalation. Higher doses of radiation have been shown to yield greater local control of the tumor. The advent of innovative technologicalfeatures in radiation therapy treatment planning and delivery has allowed the clinical use of dose escalation, increasing the radiation doseadministered to tumors in the patient, which has resulted in improved local tumor control and, in some cases, improved patient survival.Hypofractionation is an evolving radiation therapy technique that involves reducing the number of fractions and delivering larger doses ofradiation per fraction. The benefits of hypofractionation include patient convenience due to fewer visits and more efficient use of radiationtherapy systems. Stereotactic radiation therapy and stereotactic radiosurgery procedures, in which treatment is provided in one to five sessions,are extreme examples of hypofractionation. Hypofractionation has been used to date to treat only a limited number of tumor types. These tumorsare generally small and are located in a few specific, sensitive regions of the body, such as the head and neck, spinal cord, lung and prostate,where the very high intensity radiation involved in dose escalation increases the need for a radiation delivery system that is capable of locatingtumors and delivering radiation with high precision. Despite advances in radiation therapy techniques, most commercially available radiation therapy systems still present significant limitations thatrestrict clinicians' ability to provide the most effective treatment possible. These limitations include:Limited versatility and precision. The C-arm configuration of traditional radiation therapy systems has a limited range and speed of motiondue to its size and mechanical structure. Most existing multi-leaf collimators, or MLCs, which modulate or shape the radiation beams, also havemechanical limitations that reduce their beam-shaping ability and the speed at which they operate. These design elements limit the motion anddynamic range of IMRT intensities capable of being delivered by traditional radiation therapy systems and often make it impractical to deliverradiation from more than five to nine treatment angles during a typical treatment session. These limited treatment angles reduce the ability todeliver precisely targeted radiation that minimizes exposure to healthy tissue. Such imprecision may prevent clinicians from treating tumors nearsensitive anatomic structures, such as the eye or the spinal cord, or from re-treating patients in an area of the body that was previously exposedto radiation and may be unable to tolerate additional exposure.Limited ability to provide frequent, quantitative images. Precise radiation therapy requires frequent images that accurately depict the size,shape, location and density of the tumor. Many traditional radiation therapy systems either do not incorporate CT imaging functionality or useimaging technologies that do not have the ability to generate quantitative images. Lacking this data, traditional radiation therapy systems measurethe amount of radiation emitted by the device based on the system's performance specifications. This calculation does not provide the clinicianwith data regarding the amount of radiation that was received by the patient or what tissue within the7Table of Contentspatient's body received any particular amount of radiation. In addition, many radiation therapy systems have imaging subsystems that are notsuited to use for daily imaging of the patient due to concerns about the additional radiation exposure. Since it is common for internal organs toshift and for the size of the tumor to change during the course of treatment, failure to obtain updated images and adapt the treatment planthroughout the course of treatment may result in a portion, or potentially all, of the radiation dose missing the tumor and instead being absorbedby healthy tissue.Failure to integrate multiple functions. Many traditional radiation therapy systems were designed solely for the purpose of deliveringradiation and therefore do not possess integrated imaging, treatment planning, dose verification or quality assurance capabilities necessary formore advanced treatment protocols. Some systems subsequently have been adapted to include certain elements of this functionality byincorporating modular add-on devices to legacy linacs designs. These separate modular components can provide imaging, treatment planning,quality assurance procedures or post-treatment analysis functionality. However, this modular architectural approach can have safety andaccuracy implications because the onus for checking proper data transmission and receipt often falls back to manual methods forced upon theuser. This can mean a user reconfigures and recalibrates the system between patient imaging, treatment planning, radiation delivery and qualityassurance. In addition to imposing manual intervention and safety concerns, this approach unfortunately can also mean more time is required toplan and deliver treatments, thus reducing patient throughput.Development of Radiosurgery Based on the demonstrated principles of radiation as a method of destroying cancer cells, manufacturers have developed radiosurgery systems thathave initially shown to be effective in the treatment of brain tumors and there have been various attempts to develop similarly accurate systems toperform radiosurgery elsewhere in the body. By destroying the tumor with a high dose of radiation, radiosurgery systems have been shown to beeffective at local control without the risks, costs and other limitations of traditional surgery. Radiosurgery systems differ from traditional radiationtherapy systems in that they are designed to deliver a very high cumulative dose of radiation, in a single or a small number of treatments preciselytargeted at the tumor rather than at a region that consists of the tumor plus healthy tissue that surrounds the tumor area. The more accurate delivery ofradiation allows higher doses to be delivered, increasing the probability of tumor cell death and better local control. In addition, radiosurgery can be usedon patients who cannot, due to advanced age or other health reasons, tolerate traditional surgery. One of the initial radiosurgery techniques was frame-based radiosurgery for the treatment of brain tumors, which requires attaching a rigid frame tothe patient's head by screwing it into the skull through the skin to immobilize the patient's head and to aid in targeting the tumor. Besides immobilizingthe patient, the frame forms a fixed coordinate system that is used to target a tumor inside the head. Once the frame is attached, the physician thenimages the head, typically with a CT scan, to identify the tumor location relative to the frame. The physician then uses the acquired images to develop atreatment plan, and the patient receives treatment while being held in position by the rigid frame. The entire process usually lasts between four and eighthours. Although frame-based radiosurgery represents an advance in cancer treatment, it has significant shortcomings. The necessity for a rigid frame to bescrewed into a patient's skull or affixed to the body restricts the area of the body which can be treated. In addition, frame-based radiosurgery systems donot generally succeed in conforming the radiation dose to the tumor, because beam orientations are limited, and therefore it is difficult to match the shapeof the treated volume to the shape of the tumors. Further, because it is difficult to precisely reposition the head frame for multiple treatments, thesesystems are very rarely used when more than one dose of radiation is required. Frame-based8Table of Contentsradiosurgery approaches have been used for treatment of tumors in other parts of the body, but suffer from significant drawbacks. In particular, it is notpractical to attach a frame rigidly to parts of the body other than the head. Tumors in soft tissue organs such as the lung, liver, pancreas and prostate arenot rigidly fixed to any external reference points and can move significantly during treatment due to normal bodily functions. Frame-based approachesto delivering radiosurgery for tumors in such locations are rarely as accurate as frame-based systems used to treat brain tumors. This lack of accuracyfor tumors located outside the head may compromise the efficacy of traditional radiosurgery and increase the likelihood of delivering significantradiation doses to otherwise healthy tissue.Our Strategy Our goal is to develop equipment and technology that allows physicians to deliver personalized, leading-edge treatment solutions that help cancerpatients live longer, better lives. We endeavor to achieve this goal by expanding clinical opportunities for healthcare providers, helping them offer thebest treatment for each patient and by providing patients with radiation treatment tailored to their specific needs. Our vision is a future where the fear,pain and suffering of cancer are a thing of the past. We believe our current technologies and our future innovation can help to achieve this and some ofthe key elements of our strategy include the following: Increase physician adoption and patient awareness to drive utilization. We are continually working to increase adoption and awareness of oursystems and demonstrate their advantages over more traditional treatment methods. We hold and sponsor symposia and educational meetings andsupport clinical studies in an effort to demonstrate the clinical benefits of the CyberKnife System. We regularly meet with clinicians to educate andposition them on the expanded versatility that our TomoTherapy System offers in comparison to more traditional radiation therapy products. To supportawareness of all of our product offerings, we assist our customers to increase patient awareness in their communities by helping them developmarketing and educational campaigns. Continue to expand the radiosurgery market. While radiosurgery has traditionally been used to treat brain tumors, the CyberKnife Systemreceived U.S. Food and Drug Administration, or FDA, clearance in 2001 to treat tumors anywhere in the body where radiation is indicated. Based oncustomer data, over 50% of patients treated with the CyberKnife System in the United States during the year ended June 30, 2011 were treated fortumors outside of the brain. We are currently facilitating studies to further demonstrate the CyberKnife System's efficacy for treating tumors outside thebrain and we believe these studies may increase overall utilization of the CyberKnife System and continue to expand the number of patients eligible forradiosurgery. Continue to innovate through clinical development and collaboration. The clinical success of our products is due in large part to thecollaborative partnerships we have developed over the last decade with clinicians, researchers and patients. We proactively seek out and rely onconstructive feedback from system users to learn what is needed to enhance the technology. Due to this collaborative process, we continually refine andupgrade our systems, which ultimately improves our competitive position in the radiation therapy and radiosurgery markets. Our upgrades are designedto improve the ease of use and accuracy of treatment, decrease the treatment times, and improve the utilization for specific types of tumors. Expand sales in international markets. We intend to increase our sales and distribution capabilities outside of the United States to takeadvantage of the large international opportunity for our products. We currently have regional offices in Madison, Wisconsin, Paris, France, Brussels,Belgium, Hong Kong and Tokyo, Japan and direct sales staff in most countries in Western Europe, Japan, India and Canada. Combined withdistributors in Eastern Europe, Russia, the Middle East, the Asia Pacific region and Latin America, our sales and distribution channels cover more than80 countries. We intend to increase our international revenue by select additions of direct sales and marketing personnel in targeted areas to furtherpenetrate our most promising international markets, as well as additions of distributors.9Table of Contents Pursue acquisitions, strategic partnerships and joint ventures. We intend to actively pursue acquisitions, strategic partnerships and jointventures that we believe may allow us to complement our growth strategy, increase sales in our current markets and expand into adjacent markets,broaden our technology and intellectual property and strengthen our relationships with our customers. For example, we recently completed theacquisition of TomoTherapy, a creator of advanced radiation therapy solutions for cancer care.Our Products Our suite of products includes the CyberKnife® System and the TomoTherapy® System.The CyberKnife System Our principal radiosurgery product is the CyberKnife System, a robotic radiosurgery system designed to treat tumors anywhere in the body non-invasively. The current United States list price for the CyberKnife System ranges from approximately $3.6 million to $6.2 million, depending uponsystem configuration and options purchased by the customer. The list price typically includes initial training, installation and a one-year warranty. Wealso offer optional hardware and software, technical enhancements and upgrades to the CyberKnife System, as well as service contracts and training toassist customers in realizing the full benefits of the CyberKnife System. Using continual image guidance technology and computer controlled robotic mobility, the CyberKnife System is designed to automatically track,detect and correct for tumor and patient movement in real-time throughout the treatment. This design is intended to enable the CyberKnife System todeliver high-dose radiation with precision, which minimizes damage to surrounding healthy tissue and eliminates the need for invasive head or bodystabilization frames. Our patented image-guidance technology correlates low dose, real-time treatment X-rays with images previously taken with a CTscan of the tumor and surrounding tissue to direct each beam of radiation with increased precision over treatments without this real-time feedback. Thisin turn enables delivery of a highly conformal, non-isocentric dose of radiation to the tumor, with minimal radiation delivered to surrounding healthytissue. With its autonomous ability to track, detect and correct for even the slightest tumor and patient movement throughout the entire treatment, theCyberKnife System is intended to provide clinicians with an effective, uninterrupted and accurate treatment alternative. Key features of the CyberKnife System and the CyberKnife® VSI™ System include the following: CyberKnife VSI System. With the ability to offer a range of treatment options, from radiosurgery to high precision radiation therapy, theCyberKnife VSI System is designed to provide clinicians with the flexibility to optimize treatments for the unique needs of each patient. Additionally,our CyberKnife VSI System uses intelligent capabilities designed to enable expert-level treatments with an intuitive planning process and to permitclinicians to adapt treatment delivery to the distinct characteristics of each patient with continual image guidance. A comprehensive set of tools tomanage every aspect of patient treatment, ready integration into existing institution infrastructure and a logical workflow make the use of the CyberKnifeVSI System convenient in daily clinical practice. Treatment of inoperable or surgically complex tumors. The CyberKnife System may be used to target tumors that cannot be easily treated withtraditional surgical techniques because of their location, number, size, shape or proximity to vital tissues or organs, or because of the age or health of thepatient. The CyberKnife System's intelligent robotics are designed to enable the delivery of radiation doses that conform closely to the shape of thetumor. This enables the precise targeting of a tumor, while at the same time minimizing damage to surrounding healthy tissue. Radiosurgery treatmentsperformed with the CyberKnife System can also be staged over two to five treatment sessions. Robotic IMRT treatments performed with theCyberKnife System can be delivered in as many as 40 fractions.10Table of Contents Treatment of tumors throughout the body. The CyberKnife System has been cleared by the FDA to provide treatment planning and image-guided radiosurgery treatment for tumors anywhere in the body where radiation treatment is indicated. Unlike frame-based radiosurgery systems, whichare generally limited to treating brain tumors, the CyberKnife System is being used for the treatment of primary and metastatic tumors outside the brain,including tumors on or near the spine and in the lung, liver, prostate and pancreas. Real-time tracking of tumor movement. The CyberKnife System is the first device that is designed to enable the treatment of tumors that changeposition due to respiration, tumor or patient movement during treatment. That ability is achieved with a level of accuracy typically associated withradiosurgery procedures for brain tumors. The CyberKnife® VSI™ System offers the following features which enhance image guided robotic radiationsurgery including, Synchrony® Respiratory Tracking System, Xsight® Lung Tracking System, Xsight, Spine Tracking System, InTempo™ AdaptiveImaging System and Lung Optimized Treatment (optional). Significant patient benefits. Patients may be treated with the CyberKnife System on an outpatient basis without anesthesia and without the risksand complications inherent in traditional surgery. Patients do not require substantial pre-treatment preparation, and typically there is little to no recoverytime or hospital stay associated with CyberKnife System treatments. In addition, the CyberKnife System eliminates the need for an invasive rigid frameto be screwed into the patient's skull or affixed to other parts of the body. Additional revenue generation through increased patient volumes. We believe that clinical use of the CyberKnife System allows ourcustomers to effectively treat patients where extreme precision and ability to account for motion is important (as in the prostate), and patients whootherwise would not have been treated with radiation or who may not have been good candidates for surgery. Therefore, we believe the treatment ofthese patients generates additional revenue without affecting our customers' traditional radiation therapy practices. In addition, even where patients areeligible for traditional surgery, hospitals can treat more patients potentially more efficiently with the CyberKnife System than with traditional surgery,because treatment with the CyberKnife System is a non-invasive, outpatient procedure requiring little or no recovery time, while traditional surgeryrequires the patient be at the facility for the procedure and recovery time tends to be measured in days. The reduction in overall time and resourcesrequired for treatment with the CyberKnife System, when compared to traditional surgery, leads to an increase in the volume of procedures performedand potentially lower per procedure costs for the hospital. We believe the ability of hospitals to use the CyberKnife System both for patients for whomsurgery may not be an option, as well as an alternative to surgery, makes the CyberKnife System an attractive addition to our customers' cancertreatment practices. Upgradeable modular design. The CyberKnife System has a modular design which facilitates the implementation of upgrades that generally donot require our customers to purchase an entirely new system to gain the benefits of new features. We continue to work to develop and offer newclinical capabilities enhancing ease of use, reducing treatment times, improving accuracy and improving patient access. Key components andtechnologies of the CyberKnife System include the following:Compact X-band linear accelerator (linac). The linac generates the radiation that is used to treat the tumor. We believe we are the onlycommercial manufacturer of a compact X-band linac. This technology allows us to manufacture linacs that achieving similar performance. TheCyberKnife System linac provides high energy X-ray beams of different diameters and intensities without the use of radioactive material. Infiscal 2010, we introduced a linac capable of delivering 1000 monitor units per minute of energy output, representing the highest output linac wehave offered.Robotic manipulator. The robotic manipulator arm, with six-degrees-of-freedom range of movement, is designed to move around the patientto position the linac and direct the radiation11Table of Contentswith an extremely high level of precision and repeatability. The manipulator arm provides what we believe to be a unique method of positioningthe linac to deliver doses of radiation from nearly any direction and position, without the limitations inherent in gantry-based systems, creating anon-isocentric composite dose pattern with a high level of conformance to the shape of each treated tumor. This flexibility enhances the ability todiversify beam trajectories and beam entrance and exit points, helping to minimize risks of radiation damage to healthy cells near the tumor.Furthermore, the rapid response time of the manipulator arm allows tracking of tumors that move with respiration.Real-time image-guidance system with continuous target tracking and feedback. Without the need for clinician intervention or treatmentinterruption, the CyberKnife System's real-time image-guided robotics is designed to enable continuous monitoring and correction for patientand tumor movements throughout each treatment as it is being delivered. The CyberKnife System is able to deliver the prescribed radiation dosewith great precision due to the virtually instantaneous and continuous feedback loop between X-ray-based target localization and automaticcorrection of the radiation beam throughout the entire treatment. This target tracking and feedback technology uses two digital image detectors tocapture low energy X-ray images. The image guidance software carries out an automated comparison of the X-ray images with the patient's CTscan to detect, track and correct for movement of the tumor or patient before and during the treatment delivery. This allows the CyberKnifeSystem to dynamically target the tumor and adjust the position of the beam to follow the motion of the tumor throughout the treatment, directingthe beam to precisely match tumor movement.X-ray sources. The low-energy X-ray sources generate the X-ray images that help to determine the location of bony or other anatomiclandmarks, or implanted fiducials, which are used for tracking throughout the entire treatment.Image detectors. The image detectors capture high-resolution anatomical images throughout the treatment. These live images are continuallycompared to the patient's CT scan to determine real-time patient positioning. Based on this information, the robotic manipulator automaticallycorrects for detected movements. In addition to the key components listed above, we also offer the following components and technologies: Synchrony Respiratory Tracking System. The CyberKnife System's proprietary motion tracking system, the Synchrony® Respiratory TrackingSystem, is used to track tumors that move with respiration. Synchrony software and hardware correlate tumor movement due to respiration with theCyberKnife System treatment beam allowing it to continuously track the tumor as it moves throughout the respiratory cycle. Through this process theCyberKnife System delivers beams synchronized in real-time to tumor position while adapting to changes in breathing patterns, allowing for thedelivery of highly conformed radiation beams while reducing areas of healthy tissue exposed to radiation. The Synchrony system provides what webelieve is unsurpassed clinical accuracy of approximately 1.5 millimeters for tumors that move with respiration. Xsight Spine Tracking System. The Xsight® Spine Tracking System eliminates the need for surgical implantation of fiducials for the delivery ofradiosurgery treatments on or near the spine. The Xsight Spine Tracking System utilizes skeletal structures to automatically locate and track tumors withsub-millimeter accuracy. We believe no other commercially available technology today offers this capability. Xsight Lung Tracking System. The Xsight® Lung Tracking System delivers radiosurgical accuracy to some lung tumors without the need forimplanted fiducials. The Xsight Lung Tracking System directly12Table of Contentstracks the anatomy of the tumor. Integrated with the Synchrony Respiratory Tracking System, treatment margins are significantly minimized by trackingthe motion of the tumor as it moves during respiration. Lung Optimized Treatment. The Lung Optimized Treatment offers every lung SBRT patient a noninvasive treatment option, regardless of tumorlocation. Simulation and comparison workflows, combined with unique tracking modes, allow the clinician to select from multiple, non-invasiveoptions. RoboCouch Patient Positioning System. Integrated with the CyberKnife System, the RoboCouch® Patient Positioning System positions thepatient to the planned treatment position with extreme accuracy, providing not only greater set up precision, but significantly streamlining the patient setup process. The RoboCouch system offers greater positioning flexibility, a lower patient loading height, and a higher patient weight capacity limit whencompared to our Standard Treatment Couch. Standard Treatment Couch. The Standard Treatment Couch is used to automatically align the patient for treatment. Xchange Robotic Collimator Changer. The Xchange Robotic Collimator Changer automatically exchanges secondary fixed collimators, withoutclinician involvement, and is required for use with the Iris Variable Aperture collimator. These collimators determine the radiation beam size during thetreatment. Iris Variable Aperture Collimator. The Iris™ Variable Aperture Collimator enables delivery of beams in 12 unique sizes with a singlecollimator. This significantly reduces treatment times as well as the total radiation dose delivered to the patient. 4D Treatment Optimization and Planning System. Our 4D Treatment Optimization and Planning System is designed to optimize treatment bytaking into account the movement of the tumor as well as the movement and deformation, or change in shape, of the surrounding tissue, therebyminimizing margins and radiation exposure to healthy tissue. InTempo Adaptive Imaging System. The InTempo™ Adaptive Imaging System is a time-based target tracking technology used to compensatefor intrafraction prostate motion during treatment delivery. With the InTempo System, our users can utilize adaptive imaging to automatically adjust forlarge movements in patients during treatment by increasing the X-ray imaging frequency. The user also manages the image age of X-ray images byspecifying how long to wait between image acquisitions. MultiPlan Treatment Planning System. The proprietary MultiPlan treatment planning system is designed for CyberKnife radiosurgery andincludes the hardware necessary for treatment planning. The MultiPlan® Treatment Planning System generates a series of beams and calculates the dosethat must be delivered from each beam and provides these as a treatment plan. The treatment plan defines the pattern of radiation that meets thephysician's dose prescription. The MultiPlan system uses input images from multiple modalities, including computed tomography, or CT, magneticresonance imaging, or MRI, positron emission tomography, or PET, and 3D angiography. After the physician outlines a tumor and critical adjacenttissues on the computer, a medical physicist (or dosimetrist) uses the MultiPlan system to plan the number, intensity, position and direction of radiationbeams. Using patented software algorithms, the system calculates and displays the resultant treatment plan for evaluation, optimization and approval bythe physician. MultiPlan MD Suite. The MultiPlan® MD Suite solution allows remote users to perform pre-planning preparation and post-planning review oftreatment plans. MultiPlan MD Suite provides the ability to perform tasks such as contouring, fusion, setting of treatment plan parameters, and reviewof treatment plans.13Table of Contents CyberKnife Data Management System. The CyberKnife® Data Management System is designed to provide comprehensive storage andprocessing of the patient data that is generated as the patient progresses through the CyberKnife planning and treatment workflow. Pre-planning data,such as planning CT images, are imported and stored in the data management system. This information is then available for review by the clinician. Theresults of a patient's treatment delivery, such as dose delivered from each beam, each path and each fraction, as well as details about the images acquiredand corrections applied are recorded and stored in the data management system. MultiPlan Quick Review. The MultiPlan® Quick Review feature allows multiple sessions of the MultiPlan Treatment Planning System to berun simultaneously. One primary and up to three secondary sessions are available. The primary session has treatment planning functionality while thesecondary sessions can perform planning functions except for optimization. MultiPlan Quick Review improves clinical workflow by allowing data frommultiple patients, or multiple plans from the same patient, to be accessed simultaneously. Radiosurgery DICOM Interface. In a typical oncology department there are many individual systems that play a role in patient diagnosis andtreatment delivery. Each of these systems separately manages their own specialized piece of information about a patient. Often a centralized informationmanagement system such as an Oncology Information Systems, or OIS, is used to minimize the need for the clinical user to access each of theseseparate systems individually to gather information. Centralization of the patient's oncology treatment record into a single digital record provides clinicalbenefits that can be realized immediately. Data management systems, such as the CyberKnife Data Management System, utilize industry-standardinterface protocols, such as DICOM, to export patient information to the OIS. With the Radiosurgery DICOM Interface, the CyberKnife RoboticRadiosurgery System completes the OIS electronic medical record with a comprehensive export of the radiosurgery treatment history. Note: TheRadiosurgery DICOM Interface requires a compatible version of the OIS. Monte Carlo Dose Calculation. Our Monte Carlo Dose Calculation software uses Monte Carlo simulation algorithms in treatment planning anddose calculation. Our Monte Carlo dose calculation algorithm can perform the necessary treatment planning calculations in a significantly shorter timeframe as compared to conventional Monte Carlo dose calculation methods, thereby accelerating the treatment planning process. Sequential Optimization Treatment Planning. Sequential optimization treatment planning is designed to enable CyberKnife System users todefine and prioritize treatment planning objectives for each treatment plan. These objectives can include treatment dose to the targeted tumor, doseminimization in surrounding areas and total radiation delivery throughout the treatment. Sequential optimization enables these objectives to be prioritizedand tailored to the unique clinical characteristics of each patient. Robotic IMRT. Robotic IMRT™ is designed to combine IMRT delivery with the CyberKnife System in order to offer superior conformality,steep dose gradient and fully automated treatment delivery with continual image guidance, which in turn delivers high precision radiation therapy using aconventionally fractionated approach. AutoSegmentation for Prostate. The AutoSegmentation™ option provides a method for the CyberKnife System to automatically generateaccurate contours of the male pelvic anatomy, including the prostate, rectum, bladder, seminal vesicles and femoral heads. AutoSegmentation leverages aunique, model-based approach to automated contouring. Since these structures can now be defined quickly, accurately and with minimal user input,clinical workflow is greatly improved.14Table of Contents QuickPlan. Our QuickPlan® technology allows for a complete treatment plan to be generated automatically, and the results presented to the userfor review. The entire planning process, including the ability to automatically contour certain anatomical structures, automatically fuse image series andautomatically identify fiducials, as well as the scriptable nature of the Sequential Optimization algorithm are leveraged in the QuickPlan option. Becausethe treatment planning process can now be largely automated, we believe that CyberKnife staff are able to utilize their time and resources in the clinicmore effectively. Report Administration Application. The ability to easily access the data stored in the CyberKnife Data Management System is essential to thesmooth management of the CyberKnife System. The Report Administration application makes the ability to review stored patient and usage data simpleand straightforward by providing the easy availability of a variety of departmental reports.The TomoTherapy Systems Our principal radiation therapy product, the TomoTherapy System, consists of a fully integrated and versatile radiation therapy system used byhealthcare professionals in the treatment of a wide range of cancer types, which we believe offer clinicians and patients the benefits set forth below. Thecurrent United States list price for the TomoTherapy System ranges from approximately $3.5 million to $4.7 million, depending upon systemconfiguration and options purchased by the customer. The list price typically includes initial training, installation and a one-year warranty. We also offeroptional hardware and software, technical enhancements and upgrades to the TomoTherapy System, as well as service contracts and training to assistcustomers in realizing the full benefits of the TomoTherapy System. Versatile treatment capabilities. The TomoTherapy Systems' rigid ring gantry platform enables precise and efficient treatments by eliminating theneed for the repeated adjustment and re-calibration steps necessitated by imaging and treating the patient on different systems and mechanically adjustingthe C-arm to treat from different angles. The high-speed binary multi-leaf collimator, or MLC, is integrated with the linac and consists of 64 individuallow leakage tungsten leaves that move across the beam in less than 20 milliseconds to either block or allow the passage of radiation, effectively shapingthe beam as it is emitted. The shape of the treatment field is defined by the pattern of all of the highly modulated beamlets. The TomoTherapy Systemsare capable of quickly delivering tens of thousands of beamlets. The combination of the ring gantry and the high-speed MLC (which we refer to asTomoHelicalTM) allow treatment to be delivered continuously in a helical pattern 360 degrees around the patient's body, allowing radiation deliveryfrom all angles to improve radiation dose distributions for some of the most challenging cases. Moreover, with our release of the TomoDirectTMfeature, we believe the TomoTherapy Systems gain new versatility to provide high quality, fixed angle beams for those cases suited to simple tangentialbeam radiation delivery. Versatility in delivery modes effectively means efficient coverage of a wide range of patient cases, while still maintaining highquality plans throughout. In addition, all TomoTherapy Systems enable an operator to provide non-isocentric three-dimensional conformal image-guidedIMRT or stereotactic treatments within a typical cylindrical volume of 80 centimeters in diameter and up to 135 centimeters in length. This expansivetreatment field allows large areas of the body to be treated in a single session and facilitates complex treatments, such as total bone irradiation, whichspecifically irradiates bone marrow while sparing surrounding normal healthy tissue, and the treatment of widely distant tumors. The TomoTherapySystems' accuracy, precision and versatility offer clinicians an extensive range of treatment possibilities. Daily, quantitative imaging for better identification of tumors, dose verification and treatment planning. The TomoTherapy Systems offerintegrated quantitative CT imaging capabilities, which depict the density of tumors and healthy tissue more accurately than traditional radiation therapysystems. Our integrated mega-voltage computed tomography, or MVCT, which we market as our CTrue™ imaging15Table of Contentstechnology, uses a low-intensity, fan beam CT to collect quantitative images prior to each treatment. These images allow lung tissue, fat, muscle andbone to be clearly distinguished. In addition, because of the low radiation dose involved, the clinician can collect daily, quantitative images, which can beused to monitor changes in the patient's internal anatomy and quickly adapt the plan if deemed clinically necessary. In addition to being prone to certainimaging artifacts, the higher doses of radiation associated with the typical cone beam imaging subsystems in many competing radiation delivery devicesmay lead clinicians to avoid daily imaging, making those imaging systems less useful for identifying subtle changes to the tumor or internal patientanatomy. We believe that daily, quantitative, relatively low dose images are essential to optimizing patient treatment by enabling clinicians to adapt thetreatment plan in response to anatomical changes. Integrated treatment system for precise radiation delivery. We believe that the integration of our CTrue imaging technology, treatment planningand helical delivery mode of radiation beams enables highly accurate and precise radiation delivery. Our adaptive software allows clinicians to establishat the time of treatment the contours of a tumor and any sensitive structures at risk. TomoTherapy Systems use a highly efficient dose computationalgorithm to ensure that the radiation beam conforms to the patient's tumor and minimizes exposure to sensitive healthy tissue structures, providing ahighly-targeted dose distribution. These features significantly benefit patients by increasing the radiation delivered to cancerous tissues while reducingdamage to nearby healthy tissues. Efficient clinical workflow for Image Guided Radiation Therapy, or IGRT, and adaptive radiation therapy. The TomoTherapy Systemsintegrate into a single system all of the key elements for radiation therapy, including treatment planning, CT image-guided patient positioning, treatmentdelivery, quality assurance and adaptive planning. The imaging and treatment planning capabilities of many traditional systems are more modular orrequire cumbersome add-ons or separate treatment planning systems that result in clinicians taking more steps between scanning, planning and treatmentof patients. Conversely, the integrated imaging and treatment features of the TomoTherapy Systems allow clinicians to scan, plan and treat cancerpatients efficiently. This capability may enable healthcare providers to increase patient throughput for sophisticated image guided IGRT and adaptiveradiation therapy procedures using the TomoTherapy Systems. Daily images can be easily accessed remotely, via our TomoPortal™ web-enabledinterface, to verify patient positioning and collaboratively define patient treatment strategies. Taking advantage of this integration capability, ourStatRT™ software allows the full radiation therapy process—CT scanning, treatment planning and treatment delivery—to be completed rapidly. Thesoftware is currently used primarily to enhance the quality of care for palliative and other time-critical cancer cases by allowing patients to be treatedimmediately. This software option is not available for competitors' systems that lack full integration, where scanning and treatment planning are usuallycompleted a full day or more prior to delivery of treatment. Low barriers to installation and implementation. All external beam radiation systems must be housed in rooms which have special radiationshielding to capture any radiation not absorbed by the patient. The TomoTherapy Systems' size and self-contained design allow customers to retrofit itinto existing treatment rooms previously used for legacy radiation therapy systems and avoid, or reduce, the significant construction costs that can beassociated with building new, larger treatment rooms, which are often required to install many other radiation therapy systems. With both imaging andradiation delivery capabilities in its ring gantry, the TomoTherapy System requires less space than other linac systems, which use large moving arms toposition the linac or incorporate adjacent imaging equipment used for treatment planning. In addition, because the TomoTherapy System has anintegrated radiation beam stop, which captures radiation that passes through the patient, it requires less radiation shielding in treatment room walls ascompared to the shielding required by a traditional system. We also preassemble, test and commission each TomoTherapy System at our manufacturingfacility, and ship the system almost fully assembled. This assembly process typically allows radiation "beam on" within four days after delivery and firstpatient treatments to begin within 30 to 45 days after delivery.16Table of Contents Platform for further technological advancements in adaptive radiation therapy. We believe that the TomoTherapy Systems are the onlycommercially available treatment devices that enable truly adaptive radiation therapy because of their unique ability to provide daily, quantitative images,high speed delivery of radiation from fixed beam angles or helically from 360 degrees around the body and real-time verification of the dose received bythe patient. We believe that the combination of these design features and our integrated treatment planning and optimization software will allow us tocontinue to enhance the TomoTherapy Systems' adaptive capabilities to a point where clinicians will routinely and easily adjust a patient's treatment asneeded, thereby remaining true to the intent of the original treatment plan. The key functionality listed above, may be enhanced with the following product options: TomoDirect Treatment Mode. The TomoDirectTM mode is a discrete angle, non-rotational delivery mode for the TomoTherapy System. Theuser is able to create a treatment plan that defines up to twelve target-specific gantry angles. It also allows the user to define the level of modulation forthe plan, including a non-modulated three-dimensional delivery mode. Treatment planning is completed rapidly due to the power of the TomoTherapySystem computing platform. During treatment delivery, all beams for each target are delivered sequentially with the couch passing through the bore ofthe system at an appropriate speed for each gantry angle. The complete treatment delivery is initiated by a single turn of the operator console key. Amaximum radiation treatment field length of 150 cm (with treatment couch at height of isocenter plane) is possible, with no need to reposition the patientand with no field junctioning. The TomoDirectTM mode was developed as a clinical complement to the TomoHelicalTM delivery mode, and allows usersto plan and treat routine cases with greater efficiency, while maintaining the quality of TomoTherapy's unique beamlet-based delivery. Planned Adaptive software option. The Planned Adaptive™ software license enables simple and effective dose verification for single ormultiple treatment fractions. It further enables contour generation and plan modification should there be discovery of unacceptable deviations betweenthe previous plan and verified dose delivery. OIS Connect software option. The OIS Connect™ software option is a DICOM standard-based solution that provides the ability to interface aTomoTherapy System to a compatible Oncology Information System (OIS). The OIS Connect™ software facilitates greater integration of theTomoTherapy System in the radiation oncology department by:1.Allowing scheduling of TomoTherapy treatments on the OIS; 2.Providing automatic capture of TomoTherapy procedures on the OIS; 3.Aiding in charge capture and billing (where applicable) and 4.Aiding in integrating TomoTherapy treatments into patients' electronic medical records, via the OIS. SharePlan option. The SharePlan™ package provides the ability to automatically convert a treatment plan created for the TomoTherapy System,to a plan that can be delivered on a conventional linac. This allows for the introduction of the TomoTherapy® System into an environment containingmachines supplied by other vendors and can also assist with load balancing between available machines, enhancing departmental workflow andefficiency. TomoTherapy Remote Software Solutions—Remote Planning and TomoPortal. Remote Planning securely and easily provides TomoTherapyusers fully functional operation of the TomoTherapy Planning Station application from outside of the TomoTherapy System network, via the internet. Itallows a remote user to operate the Planning Station application and develop plans without being17Table of Contentsphysically present in the facility where the TomoTherapy System is installed. Remote Planning is available in select countries/locations. The TomoPortal™ application also resides on the same Remote Software Solutions computer node as the Remote Planning application. TheTomoPortal™ Remote Viewer securely and easily provides a web-enabled link to patient information stored in the TomoTherapy System. It is possibleto review a plan, registration, and treatment data from down the hall or across a continent. Tomo Quality Assurance (TQA) package. TQA™ is a calendar-based productivity tool that simplifies the collection and analysis of qualityassurance testing for TomoTherapy Systems. The application leverages internally-generated data to provide results quickly and easily. The TQA™application offers trending and reporting of many system and dosimetric parameters that allow physicists to monitor the performance of theirTomoTherapy System. To enable validation by third-party software, all data may be exported.Sales and Marketing We currently market the CyberKnife System through a direct sales force in the United States and a combination of direct sales personnel anddistributors worldwide. Support for our international sales is handled through our European and Asian headquarters in Paris, France, Hong Kong andTokyo, Japan. We market and sell our TomoTherapy Systems through an experienced team of direct sales personnel in the United States and Canada, while inLatin America our TomoTherapy Systems are marketed and sold through third-party distributors. In Europe and the Middle East, we market and sellour TomoTherapy products through the coordinated efforts of a direct sales and marketing team in most countries in Western Europe and distributors inother countries. The Asia-Pacific countries are all served by distributors, with marketing and sales support from our U.S. headquarters. In the United States, we use a combination of regional sales directors, account specialists, product managers, training specialists and fieldmarketing managers. Regional sales directors and account specialists are responsible for selling the systems, upgrades and services to hospitals andstand-alone treatment facilities. Our product managers help market our current products and work with our engineering group to identify and developupgrades and enhancements for our suite of products. Our training specialists train radiation oncologists, surgeons, physicists, dosimetrists andradiation therapists. In addition to marketing to hospitals and stand-alone treatment facilities, we market to radiation oncologists, neurosurgeons, general surgeons,oncology specialists and other referring physicians, both in the United States and internationally. We intend to continue to increase our focus onmarketing and education efforts to surgical specialists and oncologists responsible for treating tumors throughout the body. Our marketing activities alsoinclude efforts to inform and educate cancer patients about the benefits of the CyberKnife System and TomoTherapy Systems. Under our standard distribution agreement, we generally appoint an exclusive distributor for a specific country; however, Accuray typically alsoretains the right to distribute the CyberKnife System in such territories. These distributors generally provide the full range of service and salescapabilities, although we may provide installation and service support for certain distributors. According to the 2010 Radiation Therapy Market Summary Report published by IMV, as of October 2010, there were over 2,170 hospitals andstand-alone treatment facilities in the United States providing radiation therapy services. Our current United States sales and marketing focus is to targetthe hospitals and treatment facilities currently providing radiation therapy services; however, in the future we believe that the CyberKnife System and theTomoTherapy System will also be marketed to hospitals that do not have radiation therapy facilities.18Table of Contents From time to time, we may provide our CyberKnife System's linac for use in non-medical areas. These areas may include non-destructive testing,visual inspection and other potential applications. We do not currently expect these non-medical uses to represent a significant portion of our revenue inthe near term.Manufacturing We purchase major components from outside suppliers, including the robotic manipulator, treatment table or robotic couch, magnetron, whichcreates the microwaves for use in the linac, imaging cameras and computers. We closely monitor supplier quality, delivery performance andconformance to product specifications, and we also expect suppliers to contribute to our efforts to improve our manufacturing cost and quality. Some of the components are obtained from single-source suppliers. These components include the gantry, magnetron, solid state modulator anddetector for the TomoTherapy System and the robot and the imaging plates for the CyberKnife System. In most cases, if a supplier were unable todeliver these components, we believe that we would be able to find other sources for these components subject to any regulatory qualifications, ifrequired. In the event of a disruption in any of these suppliers' ability to deliver a component, we would need to secure a replacement supplier.Additionally, any disruption or interruption of the supply of key subsystems could result in increased costs and delays in deliveries of our treatmentsystems, which could adversely affect our reputation and results of operations. To help mitigate these risks, we negotiate long-term supply contracts orsubmit long-term orders and forecasts to our single-source suppliers with the goal that our demand can be satisfied and any capacity problem can bemitigated. We manufacture certain electrical subsystems, including the linac for our CyberKnife System, at our Sunnyvale, California and Mountain View,California facilities and manufacture each TomoTherapy System in Madison, Wisconsin. We manufacture the linac for our TomoTherapy System at ourChengdu, China facility. Our facilities employ state-of-the-art manufacturing techniques and equipment. Our company-wide quality systems are certifiedindependently and compliant to the internationally recognized quality system standard for medical devices, International Standards Organization, or ISO,13485:2003, and the Quality System regulations enforced by the FDA. We believe that our manufacturing facilities will be adequate for our expectedgrowth and foreseeable future demands for at least the next three years. The manufacturing processes at our facilities include subassembly, assembly, system integration and final testing. Our manufacturing personnelconsist of assemblers and technicians supported by production engineers as well as planning and supply chain managers. Our quality assuranceprogram includes various quality control measures from inspection of raw material, purchased parts and assemblies through on-line inspection. We havealso incorporated lean manufacturing techniques to improve manufacturing flow and efficiency. Lean manufacturing techniques include reducingwasteful and extraneous activities, balancing assembly and test flow, as well as better utilizing production assets and resources.Intellectual Property The proprietary nature of, and protection for, our products, product components, processes and know-how are important to our business. We seekpatent protection in the United States and internationally for our product systems and other technology where available and when appropriate. Ourpolicy is to patent or in-license the technology, inventions and improvements that we consider important to the development of our business. In addition,we use license agreements to selectively convey rights to our intellectual property to others. In addition to our patents, we also rely upon trade secrets,know-how, trademarks, copyright protection and continuing technological and licensing19Table of Contentsopportunities to develop and maintain our competitive position. We require our employees, consultants and outside scientific collaborators to executeconfidentiality, invention assignment and, where appropriate, non-competition agreements upon commencing employment or consulting relationshipswith us. We seek patent protection in the United States and in foreign jurisdictions for our product implementations, components and other technologywhere available and when appropriate. As of June 30, 2011, we held or exclusively licensed 107 U.S. patents, and 117 pending U.S. patentapplications. As of June 30, 2011, we held or exclusively licensed 190 foreign patents, and 194 foreign patent applications, which correspond to ourissued U.S. patents and pending U.S. patent applications. These patents and applications cover various components and techniques incorporated into theCyberKnife and TomoTherapy Systems, or are being incorporated into new technologies under current development, all of which we believe will allowus to maintain a competitive advantage in the field of radiation treatment. We cannot be sure that any patents will be issued from any of our pendingpatent applications, nor can we assure you that any of our existing patents or any patents that may be granted to us in the future will be commerciallyuseful in protecting our technology. Patents may provide some degree of protection for preventing others from making, using, selling, or offering for sale a system that shares one ormore features of the CyberKnife or TomoTherapy System. However, patent protection involves complex legal and factual determinations and istherefore uncertain. The laws governing patentability and the scope of patent coverage continue to evolve, particularly in the areas of technology ofinterest to us. As a result, we cannot assure you that patents will issue from any of our patent applications. The scope of any of our issued patents maynot be sufficiently broad to offer meaningful protection. In addition, our issued patents or patents licensed to us may be successfully challenged,invalidated, circumvented or unenforceable so that our patent rights would not create an effective competitive barrier. Moreover, the laws of someforeign countries may not protect our proprietary rights to the same extent as do the laws of the United States. In view of these factors, our intellectualproperty positions bear some degree of uncertainty. We have periodically monitored and continue to monitor the activities of our competitors and other third parties with respect to their use ofintellectual property. In April 2007, we entered into a License and Development Agreement, or Original Agreement, with CyberHeart, Inc., or CyberHeart, and inDecember 2010, we entered into a License Agreement, or New Agreement, with CyberHeart. As part of these agreements, we have licensed and willcontinue to license certain intellectual property rights and technologies to CyberHeart, which CyberHeart will use to develop and commercialize newsystems and applications in the field of cardiac disease. In the event CyberHeart is able to successfully develop and commercialize such an application,under the agreements, we would be the sole supplier of radiosurgery equipment to CyberHeart and would also be entitled to receive specified paymentsbased on the sale of any CyberHeart products covered by the intellectual property Accuray licenses to CyberHeart. The Original Agreement remains infull force and effect until the effective date of the New Agreement, which is the first date of human clinical treatment performed by CyberHeart, using aCyberHeart product together with a CyberKnife System, to affect cardiac tissue ablation with the goal of achieving a therapeutic effect. In December2010, we also entered into a Patent License Agreement with CyberHeart, pursuant to which CyberHeart granted the Company certain patent rights in thefield of non-tumor cardiovascular disease, which rights are exercisable by us only upon the occurrence of certain trigger events specified in the NewAgreement. We would pay a specified royalty to CyberHeart for the sale of any our products covered by the licensed CyberHeart patents. RoderickYoung, a former member of our Board of Directors, is a founder, officer and director of CyberHeart, Inc.20Table of ContentsResearch and Development Continued innovation is critical to our future success. Our current product development activities include projects expanding clinical applications inradiosurgery, driving product differentiation, and continually improving the usability, interoperability, reliability, and performance of our products. Wecontinue to seek to develop innovative technologies so that we can increase our sales. Some of our product improvements have been discussed aboveunder the heading "Products." Research activities strive to enable new product development opportunities by developing new technologies and advancing areas of existing coretechnology such as next generation linac, adaptive therapy, patient imaging, motion management, or treatment planning capabilities. The modular design of the CyberKnife System supports rapid development for new clinical capabilities and performance enhancements bygenerally allowing each subsystem to evolve within the overall platform design. Access to regular product upgrades protects customer investment in thesystem, facilitates the rapid adoption of new features and capabilities among existing installed base customers, and drives increasing value in ourmultiyear service plans. These upgrades will generally consist of software and hardware enhancements designed to increase the ease of use of ourCyberKnife System and improve the speed and accuracy of treatment. As of June 30, 2011, we had 287 employees in our research and development departments. Research and development expenses for the fiscalyears ended June 30, 2011, 2010 and 2009 were $41.7 million, $31.5 million and $36.0 million, respectively. We plan to increase our investment inresearch and development in future periods, as we seek out new business opportunities. A key component of our research and development program is our collaboration with research programs at selected hospitals, cancer treatmentcenters, academic institutions and research institutions worldwide. Our agreements with these third-party collaborators generally require us to makemilestone-based payments during the course of a particular project and often also require that we make up-front payments to fund initial activities.Generally, we own or have a right to license any inventions resulting from the collaboration. Our third-party collaborators are generally granted aroyalty-free license for the purpose of continuing their research and development, and, from time to time, we also grant broader licenses. Our researchcollaboration programs include work on clinical protocols and hardware and software developments. We also work with suppliers to develop newcomponents in order to increase the reliability and performance of our products and seek opportunities to acquire or invest in the research of otherparties where we believe it is likely to benefit our existing or future products. Through CPAC, an entity of which we owned 5.5% as of June 30, 2011, we also have a collaboration with Lawrence Livermore NationalLaboratories with regard to acceleration technology that could result in the development of a more affordable and accessible proton therapy system thanis currently available. Proton therapy is based upon the theory of depositing radiation within tumors at specific depths while minimizing radiation toadjacent healthy tissues. The project is in feasibility testing of the key components. The successful development of products from these projects,including for proton therapy, is expected to take a number of years and may not ever occur.Competition The medical device industry in general, and the non-invasive cancer treatment field in particular, are subject to intense and increasing competitionand rapidly evolving technologies. Because our products often have long development and regulatory clearance and approval cycles, we must anticipatechanges in the marketplace and the direction of technological innovation and customer demands. To compete successfully, we will need to continue todemonstrate the advantages of our products and technologies over well-established alternative procedures, products and technologies, and convincephysicians and other healthcare decision makers of the advantages of our products and technologies.21Table of ContentsTraditional surgery and other forms of minimally invasive procedures, brachytherapy, chemotherapy and other drugs remain alternatives to theCyberKnife and TomoTherapy Systems. The competitive market is primarily dominated by three companies: Elekta AB, Siemens AG, and Varian Medical Systems, Inc., or Varian. Somemanufacturers of standard linac systems, including Varian and Elekta, have products that can be used in combination with body and/or head framesystems and image-guidance systems to perform radiosurgery. Other companies that compete with us to a lesser extent include Mitsubishi HeavyIndustries and BrainLAB AG. Furthermore, many government, academic and business entities are investing substantial resources in research and development of cancertreatments, including surgical approaches, radiation treatment, MRI-guided radiotherapy systems, proton therapy systems, drug treatment, gene therapy(which is the treatment of disease by replacing, manipulating, or supplementing nonfunctional genes), and other approaches. Successful developmentsthat result in new approaches for the treatment of cancer could reduce the attractiveness of our products or render them obsolete. Our future success will depend in large part on our ability to establish and maintain a competitive position in current and future technologies. Rapidtechnological development may render the CyberKnife and TomoTherapy Systems and their technologies obsolete. Many of our competitors have ormay have greater corporate, financial, operational, sales and marketing resources, and more experience in research and development than we have. Wecannot assure you that our competitors will not succeed in developing or marketing technologies or products that are more effective or commerciallyattractive than our products or that would render our technologies and products obsolete. We may not have the financial resources, technical expertise,marketing, distribution or support capabilities to compete successfully in the future. Our success will depend in large part on our ability to maintain acompetitive position with our technologies. Our competitive position also depends, among other things, on:•Widespread awareness, acceptance and adoption of our products by the radiation oncology and cancer therapy markets; •The development of new technologies that improve the effectiveness and productivity of our systems' treatment processes; •Product and procedure coverage and reimbursement from third-party payors, insurance companies and others; •Availability of coverage and reimbursement from third-party payors, insurance companies and others for procedures performed usingour systems; •Properly identifying customer needs and delivering new upgrades to address those needs; •Published studies supporting the efficacy and safety of our systems; •Limiting the time required from proof of feasibility to routine production; •Limiting the time period and cost of regulatory approvals or clearances; •The manufacture and delivery of our products in sufficient volumes on time, and accurately predicting and controlling costs associatedwith manufacturing, installation, warranty and maintenance of the products; •Our ability to attract and retain qualified personnel; •The extent of our intellectual property protection or our ability to otherwise develop proprietary products and processes;22Table of Contents•Securing sufficient capital resources to expand both our continued research and development, and sales and marketing efforts; and •Obtaining any necessary United States or foreign regulatory approvals or clearances. Our customers' equipment purchase considerations typically include reliability, treatment quality, service capabilities, patient throughput, price,payment terms and equipment supplier viability. We believe that we compete favorably with our competitors on price and value based upon thetechnology offered by our treatment systems. We strive to provide a technologically superior product that covers substantially all aspects of radiationtherapy to deliver precise treatments with high-quality clinical outcomes that meet or exceed customer expectations. In addition to competition from technologies performing similar functions as our treatment systems, competition also exists for the limited capitalexpenditure budgets of our customers. For example, our treatment systems may compete with other equipment required by a radiation therapydepartment for financing under the same capital expenditure budget, which is typically limited. A purchaser, such as a hospital or cancer treatmentcenter, may be required to select between the two items of capital equipment. Our ability to compete may also be adversely affected when purchasedecisions are based solely upon price, since our products are premium-priced systems due to their higher level of functionality and performance. Thisoutcome is more likely to occur if hospitals and clinics give purchasing decision authority to group purchasing organizations that focus primarily onpricing when making purchase decisions.Reimbursement In the United States, healthcare providers that purchase capital equipment such as the CyberKnife and TomoTherapy Systems, generally rely ongovernment and private third-party payors for reimbursement for the healthcare treatment and services they provide. Examples of these types of payorsinclude Medicare, Medicaid, private health insurance plans, and health maintenance organizations, which reimburse all or a portion of the cost oftreatment, as well as related healthcare services. Reimbursement involves three components: coverage, coding and payment.Coverage There are currently no national coverage determinations in place under Medicare for CyberKnife or TomoTherapy treatment. Coverage criteria fortreatment with CyberKnife and TomoTherapy are outlined in local determinations or, in the absence of a formal policy, treatment is covered as long as itis considered reasonable and necessary. The most common indications covered by Medicare in local coverage determinations for robotic radiosurgeryare primary and metastatic tumors in the brain, spine, lung, liver, kidney, pancreas, adrenal gland, prostate as well as other cancers that have failedprevious treatment. Intensity Modulated Radiation Therapy (IMRT) is generally covered for cancers of head and neck, lung, breast, prostate, brain,spine, liver, pancreas, kidneys, ovaries, bladder, and other cancers appropriate for treatment with conventional fractionation. Commercial payor policies vary with most covering robotic radiosurgery for tumors in the brain, spine, and lung. Other indications such as renal,liver, prostate, and pancreatic cancers are also covered by some national and local commercial payors. IMRT is typically covered by commercial payorsfor the indications covered by Medicare.Coding The codes that are used to report robotic radiosurgery treatment delivery are healthcare common procedural codes (HCPCS) G0339 for the firstfraction and G0340 for fractions two through five. IMRT delivery is billed under Current Procedural Terminology (CPT) code 77418. Both HCPCSand23Table of ContentsCPT codes are valid codes for payment under Medicare and are recognized by commercial payors for use in the hospital outpatient and freestandingcenter sites of service. Other codes are used to report treatment planning, dosimetry, treatment management, and other procedures routinely performedfor treating radiosurgery or radiotherapy patients.Payment The majority of CyberKnife and TomoTherapy procedures are performed in the hospital outpatient department. Medicare payment for CyberKnifeand TomoTherapy procedures delivered in the hospital outpatient setting is developed by the Centers for Medicare and Medicaid Services (CMS),which calculates rates based on costs submitted by hospitals to perform outpatient procedures. Every year, CMS reviews hospital cost data foroutpatient procedures, including robotic radiosurgery and radiotherapy, makes adjustments to rates for the following year, and publishes nationalunadjusted averages for all procedures eligible for payment in this site of service. For calendar year 2011, the national unadjusted average Medicarepayment rates for robotic radiosurgery treatment delivered in the hospital outpatient department under codes G0339 and G0340 are $3,409 and $2,505respectively. The 2011 national unadjusted Medicare payment rate for IMRT delivery in the hospital outpatient department under CPT code 77418 is$438. Imaging is bundled and not separately payable in the hospital outpatient department. Payment for treatment with CyberKnife and TomoTherapy is also available in the freestanding center setting. In 2011, the primary treatmentdelivery codes for robotic radiosugery are carrier priced under Medicare and range from low payment to payment at parity with hospital outpatientdepartments to slightly above outpatient rates. Medicare payment for IMRT delivery in the freestanding center site of service is calculated by applying auniversal multiplier (called a conversion factor) to values set for resource and malpractice costs for the procedure and adjusted to account for geographicvariations. The 2011 national unadjusted Medicare payment rate for IMRT delivery in the freestanding center site of service is $523. Unlike in thehospital outpatient setting, imaging with IMRT is paid separately. On July 1, 2011, Medicare published its proposed rules for hospital outpatient services, for physicians, and services performed in the freestandingcenter setting for calendar year 2012. After a 60 day comment period, Medicare will review and analyze the comments. Once Medicare's analysis iscomplete, the final rules will be published, which we anticipate to occur near the end of October 2011. The proposed 2012 rates for robotic radiosurgerytreatment delivery in the hospital outpatient setting are $3,251 for G0339 and $2,447 for G0340. The 2012 proposed national unadjusted payment ratefor IMRT delivery under CPT code 77418 in the hospital outpatient department is $447. Image guidance remains bundled in the hospital outpatientsetting and no separate payment is made. The 2012 proposed payment in the freestanding center setting for robotic radiosurgery delivery for the first and subsequent treatments continues tobe set by local Medicare carriers. For delivery of IMRT in the freestanding clinic, Medicare has released its proposed conversion factor, resource andmalpractice values and geographic adjustment indices that would be used to calculate payment in 2012. The proposed rate using these proposed valueswould result in a payment rate of $386, a 26% decrease if Congress does not intervene to prevent major cuts in Medicare as it has done for the pasteight years. Based on historical actions, it is expected that the payment rates will be set closer to current rates for 2011 than the proposed rates for 2012.Additional payment for image guidance in this site of service remains available. Commercial payors typically base payment on a percentage of billed charges, or on contracted rates, and may benchmark prices based on a percentof Medicare rates. Medicaid develops its own payment policies independently, which vary from state to state.24Table of ContentsForeign Reimbursement Internationally, reimbursement and healthcare payment systems vary from country to country and include single-payor, government-managedsystems as well as systems in which private payors and government-managed systems exist side-by-side. In general, the process of obtaining coverageapprovals has been slower outside of the United States. Our ability to achieve adoption of our treatment systems, as well as significant sales volume ininternational markets, will depend in part on the availability of reimbursement for procedures performed using our products.Regulatory MattersDomestic Regulation Our products and software are medical devices subject to regulation by the FDA, as well as other regulatory bodies. FDA regulations govern thefollowing activities that we perform and will continue to perform to ensure that medical products distributed domestically or exported internationally aresafe and effective for their intended uses:•Product design and development; •Document and purchasing controls; •Production and process controls; •Acceptance controls; •Product testing; •Product manufacturing; •Product safety; •Product labeling; •Product storage; •Recordkeeping; •Complaint handling; •Pre-market clearance or approval; •Advertising and promotion; and •Product sales and distribution. FDA pre-market clearance and approval requirements. Unless an exemption applies, each medical device we wish to commercially distributein the United States will require either prior 510(k) clearance or pre-market approval from the FDA. The FDA classifies medical devices into one ofthree classes. Devices deemed to pose lower risks are placed in either class I or II, which requires the manufacturer to submit to the FDA a pre-marketnotification requesting permission to commercially distribute the device. This process is generally known as 510(k) clearance. Some low risk devicesare exempted from this requirement. Devices deemed by the FDA to pose the greatest risks, such as life-sustaining, life-supporting or implantabledevices, or devices deemed not substantially equivalent to a previously cleared 510(k) device, are placed in class III, requiring pre-market approval. Allof our current products are class II devices. 510(k) clearance pathway. When a 510(k) clearance is required, we must submit a pre-market notification demonstrating that our proposeddevice is substantially equivalent to a previously cleared 510(k) device or a device that was in commercial distribution before May 28, 1976 for whichthe FDA25Table of Contentshas not yet called for the submission of pre-market approval applications, or PMA. By regulation, the FDA is required to clear or deny a 510(k) pre-market notification within 90 days of submission of the application. As a practical matter, clearance generally takes longer. The FDA may requirefurther information, including clinical data, to make a determination regarding substantial equivalence. In January 2002, we received 510(k) clearance for the TomoTherapy Hi-Art System intended to be used as an integrated system for the planningand delivery of IMRT for the treatment of cancer. In August 2008, we received 510(k) clearance for our TomoDirectTM System. In July 1999, we received 510(k) clearance for the CyberKnife System for use in the head and neck regions of the body. In August 2001, wereceived 510(k) clearance for the CyberKnife System to provide treatment planning and image guided stereotactic radiosurgery and precisionradiotherapy for lesions, tumors and conditions anywhere in the body where radiation treatment is indicated. In April 2002, we received 510(k)clearance for the Synchrony Motion Tracking System as an option to the CyberKnife System, intended to enable dynamic image guided stereotacticradiosurgery and precision radiotherapy of lesions, tumors and conditions that move under influence of respiration. Pre-market approval (PMA) pathway. A PMA must be submitted to the FDA if the device cannot be approved through the 510(k) clearanceprocess. A PMA must be supported by extensive data, including but not limited to, technical, preclinical, clinical trials, manufacturing and labeling todemonstrate to the FDA's satisfaction the safety and effectiveness of the device. No device that we have developed has required pre-market approval,nor do we currently expect that any future device or indication will require pre-market approval. Product modifications. After a device receives 510(k) clearance or a PMA, any modification that could significantly affect its safety oreffectiveness, or that would constitute a significant change in its intended use, will require a new clearance or approval. We have modified aspects of ourCyberKnife and TomoTherapy families of products since receiving regulatory clearance, and we have applied for and obtained additional 510(k)clearances for these modifications when we determined such clearances were required for the modifications. The FDA requires each manufacturer tomake this determination initially, but the FDA can review any such decision and can disagree with a manufacturer's determination. If the FDA disagreeswith our determination not to seek a new 510(k) clearance or PMA, the FDA may require us to seek 510(k) clearance or pre-market approval. The FDAcould also require us to cease marketing and distribution and/or recall the modified device until 510(k) clearance or pre-market approval is obtained.Also, in these circumstances, we may be subject to significant regulatory fines or penalties. During our fiscal year ended June 30, 2011, we submittedone 510(k) clearance notification for modifications made to the operation of the CyberKnife System. The submission was cleared on November 17,2010. Pervasive and continuing regulation. After a device is placed on the market, numerous regulatory requirements apply. These include:•Quality System Regulation, or QSR, which require manufacturers, including third-party manufacturers, to follow stringent design,testing, documentation and other quality assurance procedures during product design and throughout the manufacturing process; •Labeling regulations and FDA prohibitions against the promotion of products for uncleared, unapproved or off-label uses; and •Medical device reporting regulations, which require that manufacturers report to the FDA if their device may have caused or contributedto a death or serious injury or malfunctioned in a way that would likely cause or contribute to a death or serious injury if the malfunctionwere to recur.26Table of Contents The FDA has broad post-market and regulatory enforcement powers. We are subject to unannounced inspections by the FDA and the Food andDrug Branch of the California Department of Health Services to determine our compliance with the QSR and other regulations, and these inspectionsmay include the manufacturing facilities of some of our subcontractors. In the past, our prior facility has been inspected, and observations were noted.In May 2011, during an inspection performed by the FDA at our Sunnyvale facility, several minor observations were made. We have taken correctiveaction on the observations in response to the FDA's observation. The initial classification of the inspection is considered to be Voluntary ActionIndicated. We are undertaking corrective action in response to the FDA's observations. There were no observations that involved a material violation ofregulatory requirements. We believe that we are in substantial compliance with the QSR. Failure to comply with applicable regulatory requirements canresult in enforcement action by the FDA, which may include any of the following sanctions:•Fines, injunctions, consent decrees and civil penalties; •Recall or seizure of our products; •Operating restrictions, partial suspension or total shutdown of production; •Refusing our requests for 510(k) clearance or pre-market approval of new products or new intended uses; •Withdrawing 510(k) clearance or pre-market approvals that are already granted; and •Criminal prosecution. The FDA also has the authority to require us to repair, replace or refund the cost of any medical device that we have manufactured or distributed. Ifany of these events were to occur, they could have a material adverse effect on our business. On August 3, 2010, the FDA, released for public comment two internal working group reports with numerous recommendations (1) to improvethe 510(k) process and (2) to utilize science in regulatory decision making in ways that encourage innovation yet maintain predictability of the clearanceprocess. The public comment period closed in early October 2010 and the FDA is targeting the implementation of or setting timelines for theimplementation of "non-controversial" recommendations in 2011. At the same time, the FDA acknowledges that the recommendations are preliminaryand no decisions have been made on specific changes to pursue. Nevertheless, we anticipate significant changes will result in the way the 510(k)program will operate and the data requirements, including clinical data, to obtain 510(k) clearance or PMA approval. We cannot predict what effect thesereforms will have on our ability to obtain 510(k) clearances or PMA approvals in a timely manner or the effect on our business. On June 9 and 10, 2010, the FDA held a public meeting entitled "Device Improvements to Reduce the Number of Under-doses, Over-doses, andMisaligned Exposures from Therapeutic Radiation." The expressed purpose of the meeting was to discuss steps that could be taken by manufacturers ofradiation therapy devices to help reduce misadministration and misaligned exposures. In advance of and at the meeting, the FDA requested comments inthe following areas: features that should be incorporated into radiation therapy devices and their related software, user training, and quality assurancemeasures. It is likely that the FDA will use the information gleaned at this meeting to revise the standards and requirements for designing,manufacturing and marketing devices such as ours, creating uncertainty in the current regulatory environment around our current products anddevelopment of future products. In July, 2011, the Institute of Medicine, or IOM, which was requested by the FDA to evaluate and make recommendations on the 510(k) program,released its report entitled "Medical Devices and the Public's Health, The FDA 510(k) Clearance Process." The report contained numerous and broadrecommendations that, if followed, will have a significant impact on the medical device industry. We27Table of Contentscannot predict what effect the recommendations made by the IOM in its report to the FDA will have on the 510(k) program or our ability to obtain510(k) clearances in a timely manner. Radiological health. Because our CyberKnife System and TomoTherapy Systems contain both laser and X-ray components, and because weassemble these components during manufacturing and service activities, we are also regulated under the Electronic Product Radiation ControlProvisions of the Federal Food, Drug, and Cosmetic Act. This law requires laser and X-ray products to comply with regulations and applicableperformance standards, and manufacturers of these products to certify in product labeling and reports to the FDA that their products comply with allsuch standards. The law also requires manufacturers to file new product reports, and to file annual reports and maintain manufacturing, testing and salesrecords, and report product defects. Various warning labels must be affixed. Assemblers of diagnostic X-ray systems are also required to certify inreports to the FDA, equipment purchasers, and where applicable, to state agencies responsible for radiation protection, that diagnostic and/or therapeuticX-ray systems they assemble meet applicable requirements. Failure to comply with these requirements could result in enforcement action by the FDA,which can include injunctions, civil penalties, and the issuance of warning letters. In the past, we failed to submit required reports to the FDA in a timely fashion. To correct our reporting deficiencies, in 2003 we initiated acorrective action plan that included, among other things, filing all past due reports with the FDA, applicable state agencies, and customers. We have alsodeveloped and implemented procedures to ensure future reports are made in a timely manner. While we believe all past reporting deficiencies have beencorrected, we cannot assure you that the FDA will deem our corrective actions sufficient or that the FDA will not initiate enforcement action against us.Fraud and Abuse Laws We are subject to various federal and state laws pertaining to healthcare fraud and abuse, including anti-kickback laws and physician self-referrallaws. Violations of these laws are punishable by significant criminal and civil sanctions, including, in some instances, exclusion from participation infederal and state healthcare programs, including Medicare and Medicaid. Because of the far-reaching nature of these laws, there can be no assurance thatwe would not be required to alter one or more of our practices to be in compliance with these laws. Evolving interpretations of current laws, or theadoption of new federal or state laws or regulations could adversely affect many of the arrangements we have with customers and physicians. Inaddition, there can be no assurance that the occurrence of one or more violations of these laws or regulations would not result in a material adverseeffect on our financial condition and results of operations. Anti-kickback laws. Our operations are subject to broad and changing federal and state anti-kickback laws. The Office of the Inspector Generalof the Department of Health and Human Services, or the OIG, is primarily responsible for enforcing the federal Anti-Kickback Statute and generally foridentifying fraud and abuse activities affecting government programs. The federal Anti-Kickback Statute prohibits persons from knowingly andwillfully soliciting, receiving, offering or providing remuneration directly or indirectly to induce either the referral of an individual, or the furnishing,recommending, or arranging of a good or service, for which payment may be made under a federal healthcare program such as Medicare and Medicaid."Remuneration" has been broadly interpreted to include anything of value, including such items as gifts, discounts, the furnishing of supplies orequipment, credit arrangements, waiver of payments, and providing anything of value at less than fair market value. Penalties for violating the federal Anti-Kickback Statute include criminal fines of up to $25,000 and/or imprisonment for up to five years for eachviolation, civil fines of up to $50,000 and possible exclusion from participation in federal healthcare programs such as Medicare and Medicaid. Manystates have adopted prohibitions similar to the federal Anti-Kickback Statute, some of which apply to28Table of Contentsthe referral of patients for healthcare services reimbursed by any source, not only by the Medicare and Medicaid programs, and do not includecomparable exceptions. The OIG has issued safe harbor regulations which set forth certain activities and business relationships that are deemed safe from prosecutionunder the federal Anti-Kickback Statute. There are safe harbors for various types of arrangements, including, without limitation, certain investmentinterests, leases and personal services and management contracts. The failure of a particular activity to comply in all regards with the safe harborregulations does not mean that the activity violates the federal Anti-Kickback Statute or that prosecution will be pursued. However, conduct andbusiness arrangements that do not fully satisfy each applicable safe harbor may result in increased scrutiny by government enforcement authorities suchas the OIG. The OIG has identified the following arrangements with purchasers and their agents as ones raising potential risk of violation of the federal Anti-Kickback Statute:•Discount and free good arrangements that are not properly disclosed or accurately reported to federal healthcare programs; •Product support services, including billing assistance, reimbursement consultation and other services specifically tied to support of thepurchased product, offered in tandem with another service or program (such as a reimbursement guarantee) that confers a benefit to thepurchaser; •Educational grants conditioned in whole or in part on the purchase of equipment, or otherwise inappropriately influenced by sales andmarketing considerations; •Research funding arrangements, particularly post-marketing research activities, that are linked directly or indirectly to the purchase ofproducts, or otherwise inappropriately influenced by sales and marketing considerations; and •Other offers of remuneration to purchasers that are expressly or impliedly related to a sale or sales volume, such as "prebates" and"upfront payments," other free or reduced-price goods or services, and payments to cover costs of "converting" from a competitor'sproducts, particularly where the selection criteria for such offers vary with the volume or value of business generated. We have a variety of financial relationships with physicians who are in a position to generate business for us. For example, physicians who ownour stock also provide medical advisory and other consulting and personal services. Similarly, we have a variety of different types of arrangements withour customers. For example, our shared ownership program provides a CyberKnife System to customers in exchange for the greater of fixed minimumpayments or a portion of the service revenues generated by the customer from use of the CyberKnife. Included in the fee we charge for the sharedownership program are a variety of services, including physician training, educational and marketing support, general reimbursement guidance andtechnical support. In the case of our former placement program, certain services and upgrades were provided without additional charge based onprocedure volume. In the past, we have also provided loans to our customers. We also provide research grants to customers to support customer studiesrelated to, among other things, our CyberKnife Systems. If our past or present operations are found to be in violation of the federal Anti-Kickback Statute or similar government regulations to which we orour customers are subject, we or our officers may be subject to the applicable penalty associated with the violation, including significant civil andcriminal penalties, damages, fines, imprisonment, and exclusion from the Medicare and Medicaid programs. The impact of any such violation may leadto curtailment or restructuring of our operations. Any penalties, damages, fines, or curtailment or restructuring of our operations could adversely affectour ability to operate our business and our financial results. The risk of our being found in violation of these laws is increased by the fact that some ofthese laws are open to a variety of interpretations. Any action against us for violation of these laws, even if we successfully defend against it, couldcause us to incur29Table of Contentssignificant legal expenses, divert our management's attention from the operation of our business and damage our reputation. If an enforcement actionwere to occur, our reputation and our business and financial condition could be harmed, even if we were to prevail or settle the action. Similarly, if thephysicians or other providers or entities with whom we do business are found to be non-compliant with applicable laws, they may be subject tosanctions, which could also have a negative impact on our business. Several recently enacted state and federal laws, including laws in Massachusettsand Vermont, and the federal Physician Payment Sunshine Act, now require, among other things, extensive tracking, maintenance of data basesregarding and disclosures of relationships and payments to physicians and healthcare providers. These laws require us to implement the necessary andcostly infrastructure to track and report certain payments to healthcare providers. Failure to comply with these new tracking and reporting laws couldsubject us to significant civil monetary penalties. Physician self-referral laws. We are also subject to federal and state physician self-referral laws. The federal Ethics in Patient Referrals Act of1989, commonly known as the Stark Law, prohibits, subject to certain exceptions, physician referrals of Medicare and Medicaid patients to an entityproviding certain "designated health services" if the physician or an immediate family member has any financial relationship with the entity. The StarkLaw also prohibits the entity receiving the referral from billing any good or service furnished pursuant to an unlawful referral. In addition, in July 2008, CMS issued a final rule implementing significant amendments to the regulations under the Stark Law. The final rule,which was effective October 1, 2009, imposes additional limitations on the ability of physicians to refer patients to medical facilities in which thephysician has an ownership interest for treatment. Among other things, the rule provides that leases of equipment between physician owners that mayrefer patients and hospitals must be on a fixed rate, rather than a per use basis. Prior to enactment of the final rule, physician owned entities hadincreasingly become involved in the acquisition of medical technologies, including the CyberKnife System. In many cases, these entities entered intoarrangements with hospitals that billed Medicare for the furnishing of medical services, and the physician owners were among the physicians whoreferred patients to the entity for services. The rule limits these arrangements and could require the restructuring of existing arrangements betweenphysicians owned entities and hospitals and could discourage physicians from participating in the acquisition and ownership of medical technologies.The final rule also prohibits percentage-based compensation in equipment leases. As a result of the finalization of these regulations, some existingCyberKnife System operators have modified or restructured their corporate or organizational structures. In addition, certain customers that planned toopen CyberKnife centers in the United States involving physician ownership have restructured their legal ownership structure. Certain entities were notable to establish viable models for CyberKnife System operation and therefore canceled their CyberKnife System purchase agreements. Accordingly,these regulations have resulted in cancellations of CyberKnife System purchase agreements and could also reduce the attractiveness of medicaltechnology acquisitions, including CyberKnife System purchases, by physician-owned joint ventures or similar entities. As a result, these regulationshave had, and could continue to have, an adverse impact on our product sales and therefore on our business and results of operations. A person who engages in a scheme to circumvent the Stark Law's referral prohibition may be fined up to $100,000 for each such arrangement orscheme. In addition, any person who presents or causes to be presented a claim to the Medicare or Medicaid programs in violations of the Stark Law issubject to civil monetary penalties of up to $15,000 per bill submission, an assessment of up to three times the amount claimed, and possible exclusionfrom federal healthcare programs such as Medicare and Medicaid. Various states have corollary laws to the Stark Law, including laws that requirephysicians to disclose any financial interest they may have with a healthcare provider to their patients when referring patients to that provider. Both thescope and exceptions for such laws vary from state to state.30Table of Contents Federal False Claims Act. The federal False Claims Act prohibits the knowing filing or causing the filing of a false claim or the knowing use offalse statements to obtain payment from the federal government. When an entity is determined to have violated the False Claims Act, it must pay threetimes the actual damages sustained by the government, plus mandatory civil penalties of between $5,500 and $11,000 for each separate false claim.Suits filed under the False Claims Act, known as "qui tam" actions, can be brought by any individual on behalf of the government and such individuals,sometimes known as "relators" or, more commonly, as "whistleblowers", may share in any amounts paid by the entity to the government in fines orsettlement. In addition, certain states have enacted laws modeled after the federal False Claims Act. Qui tam actions have increased significantly in recentyears, causing greater numbers of healthcare companies to have to defend a false claim action, pay fines or be excluded from Medicare, Medicaid orother federal or state healthcare programs as a result of an investigation arising out of such action. We have retained the services of a reimbursementconsultant, for which we pay certain consulting fees, to provide us and facilities that have purchased a CyberKnife System or acquired a CyberKnifeSystem through our shared ownership program, with general reimbursement advice. While we believe this will assist our customers in filing properclaims for reimbursement, and even though such consultants do not submit claims on behalf of our customers, the fact that we provide these consultantservices could expose us to additional scrutiny and possible liability in the event one of our customers is investigated and determined to be in violationof any of these laws. HIPAA. The Health Insurance Portability and Accountability Act of 1996, or HIPAA, created two new federal crimes: healthcare fraud and falsestatements relating to healthcare matters. The healthcare fraud statute prohibits knowingly and willfully executing a scheme to defraud any healthcarebenefit program, including private payors. A violation of this statute is a felony and may result in fines, imprisonment or exclusion from governmentsponsored programs. The false statements statute prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making anymaterially false, fictitious or fraudulent statement in connection with the delivery of or payment for healthcare benefits, items or services. A violation ofthis statute is a felony and may result in fines or imprisonment. As a participant in the healthcare industry, we are also subject to extensive laws and regulations protecting the privacy and integrity of patientmedical information, including privacy and security standards required under HIPAA. The HIPAA privacy standard was recently amended by theHealth Information Technology for Economic and Clinical Health Act (HITECH), enacted as part of the American Recovery and Reinvestment Act of2009. HITECH significantly increases the civil money penalties for violations of patient privacy rights protected under HIPAA. Although we are not acovered entity under HIPAA, we have entered into agreements with certain covered entities under which we are considered to be a "business associate"under HIPAA. As a business associate, we are required to implement policies, procedures and reasonable and appropriate security measures to protectindividually identifiable health information we receive from covered entities. Furthermore, as of February 2010, business associates who have access topatient health information provided by hospitals and healthcare providers are now directly subject to HIPAA, including a new enforcement scheme andinspection requirements.International Regulation International sales of medical devices are subject to foreign government regulations, which vary substantially from country to country. The timerequired to obtain clearance or approval by a foreign country may be longer or shorter than that required for FDA clearance or approval, and therequirements may be different. The primary regulatory environment in Europe is that of the European Union and the three additional member states of the European EconomicArea, or EEA, which have adopted similar laws31Table of Contentsand regulations with respect to medical devices. The European Union has adopted numerous directives and the European Committee for Standardizationhas promulgated standards regulating the design, manufacture, clinical trials, labeling and adverse event reporting for medical devices. Devices thatcomply with the requirements of the relevant directive will be entitled to bear CE conformity marking, indicating that the device conforms with theessential requirements of the applicable directives and, accordingly, may be commercially distributed throughout the member states of the EuropeanEconomic Area. The method of assessing conformity to applicable standards and directives depends on the type and class of the product, but normally involves acombination of self-assessment by the manufacturer and a third-party assessment by a notified body, an independent and neutral institution appointed bya European Union member state to conduct the conformity assessment. This relevant assessment may consist of an audit of the manufacturer's qualitysystem (currently ISO 13485), provisions of the Medical Devices Directive, and specific testing of the manufacturer's device. In September 2002 andFebruary 2005, Accuray's and TomoTherapy's facilities, respectively, were awarded the ISO 13485 certification, which replaces the ISO 9001 and EN46001 approvals, which have been subsequently maintained through periodic assessments, in accordance with the expiration dates of the standards, andwe are currently authorized to affix the CE mark to our products, allowing us to sell our products throughout the European Economic Area. We are also currently subject to regulations in Japan. A Japanese distributor received the first government approval to market the CyberKnifeSystem from the Ministry of Health and Welfare, or MHLW, in November 1996. In December, 2003, we received approval from the MHLW to marketthe CyberKnife System in Japan for clinical applications in the head and neck, and a new distributor, Chiyoda Technol Corporation, was appointed todistribute the CyberKnife System. In June 2008, we received approval from the MHLW to market the CyberKnife System for treatments throughout thebody where radiation treatment is indicated. On June 30, 2009, our subsidiary, Accuray Japan KK, became the Marketing Authorization Holder inJapan, which allowed the Company to directly sell our products in Japan. In August 2010, we received Shonin approval from MHLW to market theCyberKnife G4 System to treat tumors non-invasively anywhere in the body, inclusive of head and neck. Hi-Art Co. Ltd., the original distributor forTomoTherapy in Japan, received its original certification from the MHLW to market the TomoTherapy System for use as an integrated system for theplanning and delivery of IMR for the treatment of cancer and in January 2006, Hi-Art Co. Ltd. received Shonin approval from the MHLW to market theTomoTherapy System to for use as an integrated system for the planning and delivery of IMR for the treatment of cancer. We are subject to additional regulations in other foreign countries, including, but not limited to, Canada, Taiwan, China, Korea, and Russia in orderto sell our products. We intend that either we or our distributors will receive any necessary approvals or clearance prior to marketing our products inthose international markets.State Certificate of Need Laws In some states, a certificate of need or similar regulatory approval is required prior to the acquisition of high-cost capital items or the provision ofnew services. These laws generally require appropriate state agency determination of public need and approval prior to the acquisition of such capitalitems or addition of new services. Certificate of need regulations may preclude our customers from acquiring one of our systems, whether throughpurchase or our shared ownership program, and from performing stereotactic radiosurgery procedures using one of our systems. Several of ourprospective customers currently are involved in appeals of certificate of need determinations. If these appeals are not resolved in favor of theseprospective customers, they may be precluded from purchasing and/or performing services using one of our systems. Certificate of need laws are thesubject of continuing legislative activity, and a significant increase in the number of states regulating the32Table of Contentsacquisition and use of one of our systems through certificate of need or similar programs could adversely affect us.Backlog For a discussion of the Company's fiscal 2011 backlog, both for the CyberKnife Systems and TomoTherapy Systems, as well as for a discussionof anticipated revisions to our backlog reporting for fiscal year 2012, please refer to the section of Management's Discussion and Analysis entitled"Backlog," beginning on page 80.Employees As of June 30, 2011, we had 1,100 employees worldwide. None of the employees is represented by a labor union or is covered by a collectivebargaining agreement. We have never experienced any employment related work stoppages and we believe our relationship with our employees is good.Geographic Information For financial reporting purposes, net sales and long-lived assets attributable to significant geographic areas are presented in "Note 2. SignificantAccounting Policies" in the notes to the consolidated financial statements, which is incorporated herein by reference.Available Information Our main corporate website address is www.accuray.com. We make available on this web site, free of charge, copies of our annual reports onForm 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and our proxy statements as soon as reasonably practicable after filing suchmaterial electronically or otherwise furnishing it to the Securities and Exchange Commission, the SEC. All SEC filings are also available at the SEC'swebsite at www.sec.gov. In addition, the Corporate Governance Guidelines and the charters of the Audit Committee, Compensation Committee,Nominating and Disclosure Committee of our Board of Directors are also available on the investor relations page of our website. The contents of ourweb site are not intended to be incorporated by reference into this report or in any other report or document we file or furnish, and any references to ourweb site are intended to be textual references only.33Table of ContentsItem 1A. RISK FACTORS We operate in a rapidly changing environment that involves significant risks, a number of which are beyond our control. In addition to the otherinformation contained in this Form 10-K, the following discussion highlights some of these risks and the possible impact of these factors on ourbusiness, financial condition and future results of operations. If any of the following risks actually occur, our business, financial condition or results ofoperations may be adversely impacted, causing the trading price of our common stock to decline. In addition, these risks and uncertainties may impactthe "forward-looking" statements described elsewhere in this Form 10-K and in the documents incorporated herein by reference. They could affect ouractual results of operations, causing them to differ materially from those expressed in "forward-looking" statements.Risks Related to Our BusinessOur long-term success, results of operations and the value of our common stock depend on our ability to successfully combine the TomoTherapybusiness with our pre-existing business, which may be more difficult, costly or time-consuming than expected. On June 10, 2011, we acquired TomoTherapy, the business of which we are currently combining with our pre-existing business. Our futuresuccess, results of operations and the value of our common stock depend, in part, on our ability to realize the anticipated benefits from integrating theTomoTherapy business with our pre-existing business. To realize these anticipated benefits, we must successfully combine our businesses in anefficient and effective manner. If we are not able to achieve these objectives within the anticipated time frame, or at all, the anticipated benefits and costsavings of the acquisition may not be realized fully, or at all, or may take longer to realize than expected, and our results of operations and the value ofour common stock may be adversely affected. The integration process could result in the disruption of existing business, loss of key employees, or inconsistencies in standards, controls,procedures and policies that could adversely affect our ability to maintain relationships with customers, employees, suppliers and other businesspartners following the acquisition or to achieve the anticipated benefits of the acquisition. Specifically, issues that must be addressed in integrating theoperations of TomoTherapy into our pre-existing operations in order to realize the anticipated benefits of the acquisition include, among other things:•integrating and optimizing the utilization of the properties, equipment, suppliers, distribution channels, manufacturing, service,marketing, promotion and sales activities and information technologies of the combined company; •consolidating corporate and administrative infrastructures of the combined company; •coordinating geographically dispersed organizations of the combined company; •retaining existing customers of, and attracting new customers to, the combined company; and •conforming standards, controls, procedures and policies, business cultures and compensation structures throughout the combinedcompany. Integration efforts will also divert management attention and resources. An inability to realize the full extent of the anticipated benefits of theacquisition, as well as any delays encountered in the integration process, could have an adverse effect upon our results of operations, which may affectadversely the value of our common stock. In addition, the actual integration may result in additional and unforeseen expenses, and the anticipated benefits of the integration plan may not berealized. Actual synergies, if achieved at all, may be lower than what we expect and may take longer to achieve than anticipated. If we are not able to34Table of Contentsadequately address these challenges, we may be unable to successfully integrate the combined company's operations or to realize the anticipated benefitsof the integration.We have incurred and expect to continue to incur significant costs in connection with the acquisition and integration of TomoTherapy. We have incurred and expect to continue to incur non-recurring costs associated with combining the operations of TomoTherapy and our pre-existing operations. Most of these costs will be comprised of facilities and systems consolidation costs and employment-related costs. We also haveincurred and will continue to incur fees and costs related to integration. Additional unanticipated costs may be incurred in the integration of thecombined company's businesses or we may incur transaction-related costs and charges associated with eliminating redundant expenses or write-offs ofimpaired assets recorded in connection with the acquisition. Although we expect that the elimination of duplicative costs, as well as the realization ofother efficiencies related to the integration of the businesses, should allow us to offset incremental transaction and acquisition-related costs over time,this net benefit may not be achieved in the near term, or at all.If the CyberKnife System or TomoTherapy Systems do not achieve widespread market acceptance, we will not be able to generate the revenuenecessary to support our business. Achieving physician, patient, hospital administrator and third-party payor acceptance of the CyberKnife and TomoTherapy Systems as preferredmethods of tumor treatment will be crucial to our continued success. Physicians will not begin to use or increase the use of the CyberKnife orTomoTherapy Systems unless they determine, based on experience, clinical data and other factors, that the CyberKnife and TomoTherapy Systems aresafe and effective alternatives to current treatment methods. We often need to educate physicians about the use of stereotactic radiosurgery, IGRT andadaptive radiation therapy, convince healthcare payors that the benefits of the CyberKnife and TomoTherapy Systems and their related treatmentprocesses outweigh their costs and help train qualified physicians in the skilled use of the CyberKnife and TomoTherapy Systems. For example, thecomplexity and dynamic nature of stereotactic radiosurgery and Robotic IMRT as well as adaptive radiation therapy and IGRT, require significanteducation of hospital personnel and physicians regarding the benefits of stereotactic radiosurgery and Robotic IMRT, as well as adaptive radiationtherapy and IGRT, and require departures from their customary practices. We have expended and will continue to expend significant resources onmarketing and educational efforts to create awareness of stereotactic radiosurgery and Robotic IMRT as well as adaptive radiation therapy and IGRTgenerally and to encourage the acceptance and adoption of our products for these technologies. The CyberKnife and TomoTherapy Systems are major capital purchases, and purchase decisions are greatly influenced by hospital administratorswho are subject to increasing pressures to reduce costs. These and other factors, including the following, may affect the rate and level of marketacceptance of each of the CyberKnife and TomoTherapy Systems:•The CyberKnife and TomoTherapy Systems' price relative to other products or competing treatments; •Our ability to develop new products and enhancements and receive regulatory clearances and approval, if required, to existing productsin a timely manner; •Effectiveness of our sales and marketing efforts; •The impact of the current economic environment on our business, including the postponement by our customers of purchase decisions orrequired build-outs; •Capital equipment budgets of healthcare institutions;35Table of Contents•Increased scrutiny by state boards when evaluating certificates of need requested by purchasing institutions; •Perception by physicians and other members of the healthcare community of the CyberKnife and TomoTherapy Systems' safety,efficacy, efficiency and benefits compared to competing technologies or treatments; •Publication in peer-reviewed medical journals of data regarding the successful use and longer term clinical benefits of the CyberKnifeand TomoTherapy Systems; •Willingness of physicians to adopt new techniques and the ability of physicians to acquire the skills necessary to operate the CyberKnifeand TomoTherapy Systems; •Extent of third-party coverage and reimbursement rates, particularly from Medicare, for procedures using the CyberKnife andTomoTherapy Systems; •Development of new products and technologies by our competitors or new treatment alternatives; •Regulatory developments related to manufacturing, marketing and selling the CyberKnife and TomoTherapy Systems both within andoutside the United States; •Perceived liability risks arising from the use of new products; and •Unfavorable publicity concerning the CyberKnife or TomoTherapy Systems or radiation-based treatment alternatives. If the CyberKnife or TomoTherapy Systems are unable to achieve or maintain market acceptance, new orders and sales of our systems would beadversely affected, our revenue levels would decrease and our business would be harmed.If we are unable to develop new products or enhance existing products, we may be unable to attract or retain customers. Our success depends on the successful development, regulatory clearance or approval, introduction and commercialization of new generations ofproducts, treatment systems, and enhancements to and/or simplification of existing products. The CyberKnife System and TomoTherapy Systems,which are currently our principal products, are technologically complex and must keep pace with, among other things, the products of our competitors.We are making significant investments in long-term growth initiatives. Such initiatives require significant capital commitments, involvement of seniormanagement and other investments on our part, which we may be unable to recover. Our timeline for the development of new products or enhancementsmay not be achieved and price and profitability targets may not prove feasible. Commercialization of new products may prove challenging, and we maybe required to invest more time and money than expected to successfully introduce them. Once introduced, new products may adversely impact ordersand sales of our existing products, or make them less desirable or even obsolete. Compliance with regulations, competitive alternatives, and shiftingmarket preferences may also impact the successful implementation of new products or enhancements. Our ability to successfully develop and introduce new products, treatment systems and product enhancements and simplifications, and the revenuesand costs associated with these efforts, are affected by our ability to:•Properly identify customer needs; •Prove feasibility of new products; •Educate physicians about the use of new products and procedures;36Table of Contents•Limit the time required from proof of feasibility to routine production; •Comply with internal quality assurance systems and processes timely and efficiently; •Limit the timing and cost of obtaining regulatory approvals or clearances; •Accurately predict and control costs associated with inventory overruns caused by phase-in of new products and phase-out of oldproducts; •Price our products competitively; •Manufacture and deliver our products in sufficient volumes on time, and accurately predict and control costs associated withmanufacturing, installation, warranty and maintenance of the products; •Manage customer acceptance and payment for products; •Manage customer demands for retrofits of both old and new products; and •Anticipate and compete successfully with competitors. Even if customers accept new products or product enhancements, the revenues from these products may not be sufficient to offset the significantcosts associated with making them available to customers. We cannot be sure that we will be able to successfully develop, obtain regulatory approval or clearance for, manufacture or introduce newproducts, treatment systems or enhancements, the roll-out of which involves compliance with complex quality assurance processes, including the qualitysystem regulation, or QSR, enforced by the FDA. Failure to obtain regulatory approval or clearance for our products or to complete these processes in atimely and efficient manner could result in delays that could affect our ability to attract and retain customers, or could cause customers to delay or cancelorders, causing our backlog, revenues and operating results to suffer.Siemens AG and Accuray have not made material progress under the sales and R&D collaboration opportunities outlined in the StrategicAlliance Agreement signed in June 2010 and may not make further progress in the future. In June 2010, we entered into a Strategic Alliance Agreement with Siemens AG, or the Alliance Agreement, pursuant to which (1) we grantedSiemens certain distribution rights to our CyberKnife Systems, (2) Siemens agreed to incorporate certain Accuray technology into certain of its linacproducts, the combined products being known as the Cayman Products, and (3) we created a research and development relationship between Accurayand Siemens for the pursuit and implementation of other potential collaboration opportunities in the future. Siemens' right to distribute the CyberKnifeSystem under the Alliance Agreement remains unchanged, though sales activity to date under the Agreement has not been material. We believe that as aresult of our acquisition of TomoTherapy, the elements of the Alliance Agreement described in clauses (2) and (3) above are unlikely to develop further.Under the Alliance Agreement, both Siemens and the Company had the right to terminate the Alliance Agreement on written notice within 60 daysfollowing the acquisition of or by either party by specified competitors. On August 3, 2011, we entered into an Amendment to the Alliance Agreementwith Siemens, which provides that each of the Company's and Siemens' right to terminate the Alliance Agreement as a result of the acquisition ofTomoTherapy by the Company is extended until December 31, 2011 in order to allow the Company and Siemens to evaluate the impact of theTomoTherapy acquisition on the arrangements created by the Alliance Agreement. There can be no assurance that the strategic alliance with Siemens AG will be successful or that the economic terms of the Alliance Agreement willultimately prove to be favorable to us or that Siemens will not terminate the Alliance Agreement as a result of the Company's acquisition of37Table of ContentsTomoTherapy. We are not able to control the amount and timing of resources that Siemens will devote to the development, sales or marketing of theCayman Products, the distribution of CyberKnife Systems, or to future collaboration opportunities. Our own business may be disrupted, and we mayhave to divert attention from our other research and development activities, in order to satisfy our obligations under the Alliance Agreement. We mayincur costs in excess of the consideration to be paid to us by Siemens. Even if Siemens and the Company successfully complete development of aproduct, it may not receive the regulatory approvals necessary to be marketed and sold. Failure to successfully develop, market and sell the product,failure of Siemens to distribute the CyberKnife System, and the failure of us and Siemens to successfully collaborate on future opportunities couldnegatively impact our stock price and our future business and financial results.If we are not able to meet the requirements of our license agreement with the Wisconsin Alumni Research Foundation (WARF) we could loseaccess to the technologies licensed thereunder and be unable to manufacture, market or sell the TomoTherapy Systems. We license patents from WARF covering the multi-leaf collimator and other key technologies incorporated into the TomoTherapy Systems under alicense agreement that requires us to pay royalties to WARF. In addition, the license agreement obligates us to pursue an agreed development plan andto submit periodic reports, and restricts our ability to take actions to defend the licensed patents. WARF has the right to unilaterally terminate theagreement if we do not meet certain minimum royalty obligations or satisfy other obligations related to our utilization of the technology. If WARF wereto terminate the agreement or if we were to otherwise lose the ability to exploit the licensed patents, our competitive advantage would be reduced and wemay not be able to find a source to replace the licensed technology. The license agreement reserves to WARF the initial right to defend or prosecute anyclaim arising with respect to the licensed technology. If WARF does not vigorously defend the patents, we may be required to engage in expensivepatent litigation to enforce our rights, and any competitive advantage we have based on the licensed technology may be hampered. Any of these eventscould adversely affect our business, financial condition and results of operations.We may not be able to realize all of the desired benefits from our relationship with Compact Particle Acceleration Corporation ("CPAC"). Since April 2008, TomoTherapy, has been an investor in CPAC to continue development of its research initiative for a compact proton therapysystem for the treatment of cancer. CPAC has and is continuing to seek investments from third parties to support the development of this technology.Through TomoTherapy we currently have the option to purchase a portion of the CPAC stock held by CPAC investors in exchange for the right tocommercialize the technology in the medical field, and we have the right to exercise this option at any time through April 2015. We may not be able toobtain all of the potential benefits relating to CPAC that we may desire. In addition, CPAC needs additional funding to continue its development efforts.We cannot be certain that CPAC will be able to obtain all of the additional financing required for this project on commercially reasonable terms or thatthe technology development will be successful. Even if CPAC is able to obtain financing and the technology development is successful, CPAC may nothave the resources to commercialize the compact proton system, the market requirements may change such that commercialization is no longer feasible,or we may not be in a position to finance the option to purchase a portion of the CPAC stock held by CPAC investors in exchange for the right tocommercialize the technology in the medical field. Any of these events could adversely affect our business, financial condition and results of operations.38Table of ContentsIf we are unable to maintain existing research collaboration relationships, enter into new collaboration arrangements in the future or enter intolicense agreements with our collaborators and others, our ability to enhance our products may be adversely affected. We have entered into a number of research collaboration arrangements with a range of hospitals, cancer treatment centers and academic institutions.These collaborations support our internal research and development capabilities and represent a key element of our ongoing research and developmentprogram. Our research collaboration partners may not fulfill all of their obligations under our arrangements with them. If our current researchcollaborations do not meet our research and development expectations, or if we are unable to enter into additional research collaborations in the future toreplace unproductive collaborations or add new collaborations, our ability to enhance our products may be adversely affected. Our inability tosuccessfully collaborate with third parties could increase our development costs, delay new or pending developments and limit the likelihood ofsuccessful enhancements to the CyberKnife or TomoTherapy Systems. Our collaboration agreements generally provide that we either own, in the case of our own developments, have the right to use, in the case of jointdevelopments, or have the right to license, in the case of developments by our collaborator, technology developed pursuant to a collaboration. We cannotprovide any assurance that we will successfully enter into license agreements with any of our collaborators concerning technology that is jointlydeveloped or developed by the collaborator, which may prevent us from using that technology. If we are unable to enter into exclusive licenseagreements with a collaborator over technology that is jointly developed with, or solely developed by, the collaborator, the collaborator may be able touse or license the technology to third parties. Furthermore, if we are unable to enter into license agreements with a collaborator for technology that isjointly developed with, or solely developed by, the collaborator, we may be unable to use that technology. In addition, if we are unable to agree with ourcollaborators concerning ownership or proper inventorship of technology developed under the collaboration agreement, we may be forced to engage inarbitration or litigation to determine the proper ownership or inventorship. Any of these events could adversely affect our business, financial conditionand results of operations.Disruption of critical information systems could harm our business and financial condition. Information technology helps us operate efficiently, interface with customers, maintain financial accuracy and efficiency, and accurately produceour financial statements. We implemented and began use of a new Enterprise Resource Planning, or ERP system effective January 1, 2011. Our initialimplementation covered the basic elements of our ERP system. We plan to implement additional capabilities in the future and are in the process ofmigrating processes and system used by TomoTherapy to the processes and systems used with our new ERP system. If we do not allocate andeffectively manage the resources necessary to build and sustain the proper technology infrastructure, or if we fail to smoothly manage the new ERPsystem or its integration with TomoTherapy's processes and systems, we could be subject to transaction errors, processing inefficiencies, the loss ofcustomers, business disruptions, or the loss of or damage to intellectual property through security breach. If our data management systems do noteffectively collect, store, process and report relevant data for the operation of our business, whether due to equipment malfunction or constraints,software deficiencies, or human error, our ability to effectively plan, forecast and execute our business plan and comply with applicable laws andregulations will be impaired, perhaps materially. Any such impairment could materially and adversely affect our financial condition, results ofoperations, cash flows and the timeliness with which we internally and externally report our operating results.39Table of ContentsIf we are unable to provide the significant education and training required for the healthcare market to accept our products, our business willsuffer. In order to achieve market acceptance of the CyberKnife and TomoTherapy Systems, we often need to educate physicians about the use ofstereotactic radiosurgery and radiation therapy, convince healthcare payers that the benefits of the CyberKnife and TomoTherapy Systems and theirrelated treatment processes outweigh their costs and help train qualified physicians in the skilled use of these systems. For example, the complexity anddynamic nature of stereotactic radiosurgery and Robotic IMRT as well as adaptive radiation therapy and IGRT require significant education of hospitalpersonnel and physicians regarding the benefits of stereotactic radiosurgery and Robotic IMRT as well as adaptive radiation therapy and IGRT andrequire departures from their customary practices. In addition, we also must educate clinicians regarding the entire functionality of our radiation therapysystems, including techniques using the full quantitative imaging capabilities of our treatment systems, which enable clinicians to adapt a patient'streatment plan in response to anatomical changes and the cumulative amount of radiation received by specific areas within the patient over the course oftreatment. We have expended and will continue to expend significant resources on marketing and educational efforts to create awareness of stereotacticradiosurgery, Robotic IMRT as well as adaptive radiation therapy and IGRT and to encourage the acceptance and adoption of our products for thesetechnologies. We cannot be sure that any products we develop will gain significant market acceptance among physicians, patients and healthcare payors,even if we spend significant time and expense on their education. Failure to gain significant market acceptance would adversely affect our product salesand revenues, harming our business, financial condition and results of operations.We have a large accumulated deficit, may incur future losses and may be unable to maintain profitability. As of June 30, 2011, we had an accumulated deficit of $144.4 million. We may incur net losses in the future, particularly as we increase ourmanufacturing, research and development, and marketing activities. Our ability to maintain long-term profitability is largely dependent on our ability tosuccessfully market and sell the CyberKnife and TomoTherapy Systems and to control our costs and effectively manage our growth. We cannot assureyou that we will be able to maintain profitability. In the event we fail to maintain profitability, our stock price could decline.Multiple factors may adversely affect our ability to fully utilize certain tax loss carryforwards. As of June 30, 2011, we had approximately $116.1 million and $45.9 million in federal and state net operating loss carry forwards, respectively,which expire in varying amounts beginning in 2019 for federal and 2015 for state purposes. Included in the federal and state net operating losscarryforwards is $72.0 million of federal net operating loss carryforwards and $18.0 million of state net operating loss carryforwards from theacquisition of TomoTherapy. The federal and state net operatig loss carryforwards will expire in varying amounts beginning in 2010 for federalpurposes and 2015 for state purposes. In addition, as of June 30, 2011, we had federal and state research and development tax credits of approximately$7.6 million and $7.5 million, respectively. The federal research credits will begin to expire in 2025 and the California research credits have noexpiration date. Utilization of our net operating loss and credit carry forwards is subject to annual limitation due to the ownership change limitationsprovided by Section 382 of the Internal Revenue Code and similar state provisions. However, none of Accuray and TomoTherapy's federal and state netoperating loss carryforwards are expected to expire as a result of the ownership change limitation.40Table of ContentsWe face risks related to the current global economic environment, which could delay or prevent our customers from obtaining financing topurchase the CyberKnife and TomoTherapy Systems and implement the required facilities, which would adversely affect our business, financialcondition and results of operations. The state of the global economy continues to be somewhat uncertain. The current global economic conditions pose a risk that could impactconsumer and customer demand for our products, as well as our ability to manage normal commercial relationships with our customers, suppliers andcreditors, including financial institutions. If the current situation deteriorates or does not improve, our business could be negatively affected, includingsuch areas as reduced demand for our products resulting from a slow-down in the general economy, supplier or customer disruptions and/or temporaryinterruptions in our ability to conduct day-to-day transactions through our financial intermediaries involving the payment to or collection of funds fromour customers, vendors and suppliers. In addition, due to uncertain credit markets and concerns regarding the availability of credit, particularly in the United States, some of ourcustomers have been delayed in obtaining, or have not been able to obtain, necessary financing for their purchases of the CyberKnife or TomoTherapysystems. In addition, some of our customers have been delayed in obtaining, or have not been able to obtain, necessary financing for the construction orrenovation of facilities to house CyberKnife or TomoTherapy Systems, the cost of which typically range from approximately $0.35 million for aTomoTherapy System and $0.5 million for a CyberKnife System, for customers who makes only minor renovations to existing facilities, to up to$2 million for a TomoTherapy System and $2.5 million for a CyberKnife System, for customers who build entirely new facilities that include additionalfeatures not necessarily required for the operation of a TomoTherapy or CyberKnife System (e.g., audio visual equipment). This range is based solelyon information provided to us by customers and will vary by geography and the needs of a particular customer. To date, these delays have primarilyaffected customers that were planning to operate freestanding CyberKnife or TomoTherapy Systems centers, rather than hospital-based customers.These delays have in some instances led to our customers postponing the shipment and installation of previously ordered systems or cancelling theirsystem orders, and may cause other customers to postpone their system installation or to cancel their agreements with us. An increase in delays andorder cancellations of this nature would adversely affect our product sales, backlog and revenues, and therefore harm our business and results ofoperations.The high unit price of the CyberKnife and TomoTherapy Systems, as well as other factors, may contribute to substantial fluctuations in ouroperating results, which could adversely affect our stock price. Because of the high unit price of the CyberKnife and TomoTherapy Systems and the relatively small number of units installed each quarter, eachinstallation of a CyberKnife or TomoTherapy System can represent a significant percentage of our revenue for a particular quarter. Therefore, if we donot install a CyberKnife or TomoTherapy System when anticipated, our operating results will vary significantly from our expectations. This is ofparticular concern in the current volatile economic environment, where we have had experiences with customers cancelling or postponing orders for ourCyberKnife and TomoTherapy Systems and delaying any required build-outs. These fluctuations and other potential fluctuations mean that you shouldnot rely upon our operating results in any particular period as an indication of future performance. In particular, in addition to the other risk factorsdescribed above and below, factors which may contribute to these fluctuations include:•Timing of when we are able to recognize revenue associated with sales of the CyberKnife and TomoTherapy Systems, which variesdepending upon the terms of the applicable sales and service contracts; •The proportion of revenue attributable to purchases of the CyberKnife and TomoTherapy Systems which are associated with our sharedownership program and our legacy service plans; •Timing and level of expenditures associated with new product development activities;41Table of Contents•Regulatory requirements in some states for a certificate of need prior to the installation of a radiation device; •Delays in shipment due, for example, to unanticipated construction delays at customer locations where our products are to be installed,cancellations by customers, natural disasters or labor disturbances; •Delays in our manufacturing processes or unexpected manufacturing difficulties; •Timing of the announcement, introduction and delivery of new products or product upgrades by us and by our competitors; •Timing and level of expenditures associated with expansion of sales and marketing activities such as trade shows and our overalloperations; •Fluctuations in our gross margins and the factors that contribute to such fluctuations, as described in the Management's Discussion andAnalysis of Financial Condition and Results of Operations; •How well we execute on our strategic and operating plans; •The extent to which our products gain market acceptance; •Actions relating to regulatory matters; •Demand for our products; •Our ability to develop, introduce and market new or enhanced versions of our products on a timely basis; •Our ability to protect our proprietary rights and defend against third party challenges; •Disruptions in the supply or changes in the costs of raw materials, labor, product components or transportation services; and •Changes in third party coverage and reimbursement, changes in government regulation, or a change in a customer's financial condition orability to obtain financing. These factors are difficult to forecast and may contribute to substantial fluctuations in our quarterly revenues and substantial variation from ourprojections, particularly during the periods in which our sales volume is low. These fluctuations may cause volatility in our stock price.Because the majority of our revenue is derived from sales of the CyberKnife and TomoTherapy Systems, and because we experience a long andvariable sales and installation cycle, our quarterly results may be inconsistent from period to period. These fluctuations in revenue may make itdifficult to predict our revenue. Our primary products are the CyberKnife and TomoTherapy Systems. We expect to generate substantially all of our revenue for the foreseeablefuture from sales of and service contracts for the CyberKnife and TomoTherapy Systems. The CyberKnife and TomoTherapy Systems have lengthysales and purchase order cycles because they are major capital equipment items and require the approval of senior management at purchasinginstitutions. Selling our systems, from first contact with a potential customer to a complete order, generally spans six months to two years and involvespersonnel with multiple skills. The sales process in the United States typically begins with pre-selling activity followed by sales presentations and othersales-related activities. After the customer has expressed an intention to purchase a CyberKnife or TomoTherapy Systems, we negotiate and enter into adefinitive purchase contract with the customer. Typically, following the execution of the contract, the customer begins the building or renovation of afacility to house the CyberKnife or TomoTherapy System, which together with the subsequent installation of the CyberKnife or TomoTherapy System,can take up to 24 months42Table of Contentsto complete. During the period prior to installation, the customer must build a radiation-shielded facility to house its CyberKnife or TomoTherapySystem. In order to construct this facility, the customer must typically obtain radiation device installation permits, which are granted by state and localgovernment bodies, each of which may have different criteria for permit issuance. If a permit were denied for installation at a specific hospital ortreatment center, our CyberKnife or TomoTherapy System could not be installed at that location. In addition, some of our customers are cancer centersor facilities that are new, and in these cases it may be necessary for the entire facility to be completed before the CyberKnife or TomoTherapy Systemcan be installed, which can result in additional construction and installation delays. Our sales and installations of CyberKnife and TomoTherapySystems tend to be heaviest during the third month of each fiscal quarter. Under our revenue recognition policy, we generally do not recognize revenue attributable to a CyberKnife or TomoTherapy System purchase untilafter installation has occurred, if we are responsible for providing installation, or delivery. For international sales through distributors, we typicallyrecognize revenue when the system is shipped with evidence of sell through to the end user. Under our current forms of purchase and service contracts,we record a majority of the purchase price as revenue for a CyberKnife or TomoTherapy System upon installation or delivery of the system. Eventsbeyond our control may delay installation and the satisfaction of contingencies required to receive cash inflows and recognize revenue, such as:•Procurement delay; •Customer funding or financing delay; •Delay in or unforeseen difficulties related to customers organizing legal entities and obtaining financing for CyberKnife or TomoTherapySystem acquisition; •Construction delay; •Delay pending customer receipt of regulatory approvals, including, for example, certificates of need; •Delay pending customer receipt of a building or radiation device installation permit; and •Delay caused by weather or natural disaster. In the event that a customer does not, for any of the reasons above or other reasons, proceed with installation of a system after entering into apurchase contract, we would only recognize up to the deposit portion of the purchase price as revenue, unless the deposit was refunded to the customer.Therefore, the long sales cycle together with delays in the shipment and installation of CyberKnife and TomoTherapy Systems or customer cancellationswould adversely affect our cash flows and revenue, which would harm our results of operations and may result in significant fluctuations in ourreporting of quarterly revenues. Because of these fluctuations, it is likely that in some future quarters, our operating results will fall below theexpectations of securities analysts or investors. If that happens, the market price of our stock would likely decrease. These fluctuations also mean thatyou will not be able to rely upon our operating results in any particular period as an indication of future performance.Our ability to increase our profitability depends in part on maintaining or increasing our gross margins on product sales and service, which wemay not be able to achieve. A number of factors may result in adverse impacts to our gross margins, including:•Actions related to new products, pricing and marketing programs; •The timing of revenue recognition and revenue deferrals; •Sales discounts;43Table of Contents•Changes in product configurations; •Increases in material or labor costs; •Increased service or warranty costs or the failure to reduce service or warranty costs, especially with respect to the TomoTherapySystems; •Excess inventory and inventory holding charges; •Obsolescence charges; •Our ability to reduce production costs; •Increased price competition; •Variation in the margins across products installed in a particular period; and •How well we execute on our strategic and operating plans.We may not be able to achieve profitability with respect to our service business relating to TomoTherapy's Systems. Our overall service operations relating to TomoTherapy Systems currently are not profitable. Our ability to increase the profitability of this servicebusiness depends in part on reducing warranty and service costs for the TomoTherapy Systems and improving economies of scale in service operations.We may be unable to achieve these reductions in costs or improve the reliability of the TomoTherapy Systems during the time period expected or at all,and this could adversely affect our results of operations.If third-party payors do not provide sufficient coverage and reimbursement to healthcare providers for use of the CyberKnife and TomoTherapySystems, demand for our products and our revenue could be adversely affected. Our customers rely significantly on reimbursement for CyberKnife and TomoTherapy procedures. Our ability to commercialize our productssuccessfully will depend in significant part on the extent to which public and private third-party payors provide adequate coverage and reimbursementfor procedures that are performed with our products. Third party payors, and in particular managed care organizations, challenge the prices charged formedical products and services and institute cost containment measures to control or significantly influence the purchase of medical products andservices. If reimbursement policies or other cost containment measures are instituted in a manner that significantly reduces the coverage for or paymentfor our procedures that are performed with our products, our existing customers may not continue using our products or may decrease their use of ourproducts, and we may have difficulty obtaining new customers. Such actions would likely have a material adverse effect on our operating results. InNovember 2010, the centers for Medicare and Medicaid Services, or CMS, issued the 2011 Medicare payment rates. CMS reviews such rates annually,and we expect CMS to issue the 2012 payment rates in late November 2011. If in the future CMS significantly decreases reimbursement rates forstereotactic radiosurgery, Robotic IMRT or radiation therapy services, or if other cost containment measures are implemented in the United States orelsewhere, such changes could discourage cancer treatment centers and hospitals from purchasing our products. We have seen our customers' decisionmaking process complicated by the uncertainty surrounding the proposed reduction in Medicare reimbursement rates for radiotherapy and radiosurgeryat freestanding clinics in the United States and for physician reimbursement for radiation oncology, which has resulted in delay and sometimes evenfailure to purchase our products.44Table of ContentsWe rely on a third party to perform spare parts shipping and other logistics functions on our behalf. A failure or disruption at our logisticsprovider would adversely impact our business. Customer service is a critical element of our sales strategy. As of June 30, 2011, third-party logistics providers stored most of our spare partsinventory in depots around the world and performed a significant portion of our spare parts logistics and shipping activities. If any of our logisticsproviders suffers an interruption in its business, or experiences delays, disruptions or quality control problems in its operations, or we have to changeand qualify alternative logistics providers for our spare parts, shipments of spare parts to our customers may be delayed and our reputation, business,financial condition and results of operations may be adversely affected.Our industry is subject to intense competition and rapid technological change, which may result in products or new tumor treatments that aresuperior to the CyberKnife and TomoTherapy Systems. If we are unable to anticipate or keep pace with changes in the marketplace and thedirection of technological innovation and customer demands, our products may become less useful or obsolete and our operating results willsuffer. The medical device industry in general and the non-invasive cancer treatment field in particular are subject to intense and increasing competitionand rapidly evolving technologies. Because our products often have long development and government approval cycles, we must anticipate changes inthe marketplace and the direction of technological innovation and customer demands. To compete successfully, we will need to continue to demonstratethe advantages of our products and technologies over well-established alternative procedures, products and technologies, and convince physicians andother healthcare decision makers of the advantages of our products and technologies. Traditional surgery and other forms of minimally invasiveprocedures, brachytherapy, chemotherapy or other drugs remain alternatives to the CyberKnife and TomoTherapy Systems. We consider the competition for the TomoTherapy Systems to be existing radiation therapy systems, primarily using C-arm linacs, sold by large,well-capitalized companies with significantly greater market share and resources than we have. Several of these competitors are also able to leveragetheir fixed sales, service and other costs over multiple products or product lines. In particular, we compete with a number of existing radiation therapyequipment companies including Varian Medical Systems, Inc., Elekta AB, Siemens Medical Solutions, Mitsubishi Heavy Industries, and to a lesserextent, BrainLAB AG. Varian Medical Systems has been the leader in the external beam radiation therapy market for many years and has the majoritymarket share for radiation therapy systems worldwide. In 2008, Varian began selling and installing RapidArc technology. The RapidArc technologypurports to be able to deliver image-guided, intensity-modulated radiation therapy more rapidly than other similar systems, including the TomoTherapySystems, and Varian has maintained a strong marketing campaign claiming this technology has the same capabilities as, or better capabilities than, ourTomoTherapy Systems. In April, 2010, Varian announced the launch of a new line of TrueBeam systems, which Varian claims are specificallydesigned for high-precision image-guided radiotherapy and radiosurgery. Varian claims this new platform is designed to be versatile and can be usedfor all forms of advanced external beam radiation therapy. The CyberKnife System also competes directly with conventional linac based radiation therapy systems primarily from Elekta AB, BrainLAB AG,Mitsubishi Heavy Industries and Varian Medical Systems. At least one other company has announced that it is developing a product that, if introduced,would be directly competitive with the CyberKnife. In general, because of aging demographics and attractive market factors in oncology, we believe thatnew competitors will enter the radiosurgery and radiation therapy markets in the years ahead. The CyberKnife System has not typically been used toperform traditional radiation therapy and therefore competition has been limited with conventional medical linacs that perform traditional radiationtherapy. However, the CyberKnife VSI System, which we introduced in November of 2009, may be used to perform Robotic IMRT, an advancedmethod of traditional radiation therapy, which products of Elekta, Siemens and Varian are also capable of45Table of Contentsperforming. In addition, some manufacturers of conventional linac based radiation therapy systems, including Varian and Elekta, have products that canbe used in combination with body and/or head frames and image-guidance systems to perform radiosurgery. Furthermore, many government, academic and business entities are investing substantial resources in research and development of cancertreatments, including surgical approaches, radiation treatment, MRI-guided radiotherapy systems, proton therapy systems, drug treatment, gene therapy,which is the treatment of disease by replacing, manipulating, or supplementing nonfunctional genes, and other approaches. Moreover, at least one othercompany has announced that it is developing a product that, if introduced, would be directly competitive with the CyberKnife System. Successfuldevelopments that result in new approaches for the treatment of cancer could reduce the attractiveness of our products or render them obsolete. Our future success will depend in large part on our ability to establish and maintain a competitive position in current and future technologies. Rapidtechnological development may render the CyberKnife and TomoTherapy Systems and their technologies obsolete. Many of our competitors have ormay have greater corporate, financial, operational, sales and marketing resources, and more experience and resources in research and development thanwe have. We cannot assure you that our competitors will not succeed in developing or marketing technologies or products that are more effective orcommercially attractive than our products or that would render our technologies and products obsolete. We may not have the financial resources,technical expertise, marketing, distribution or support capabilities to compete successfully in the future. Our success will depend in large part on ourability to maintain a competitive position with our technologies. Our competitive position also depends on:•Widespread awareness, acceptance and adoption by the radiation oncology and cancer therapy markets of our products; •The development of new technologies that improve the effectiveness and productivity of the CyberKnife System radiosurgery processand the TomoTherapy System radiation therapy process; •Product and procedure coverage and reimbursement from third-party payors, insurance companies and others; •Availability of coverage and reimbursement from third-party payors, insurance companies and others for procedures performed usingour systems; •Properly identifying customer needs and delivering new products or product enhancements to address those needs; •Published studies supporting the efficacy and safety and long-term clinical benefit of the CyberKnife and TomoTherapy Systems; •Limiting the time required from proof of feasibility to routine production; •Limiting the timing and cost of obtaining regulatory approvals or clearances; •The manufacture and delivery of our products in sufficient volumes on time, and accurately predicting and controlling costs associatedwith manufacturing, installation, warranty and maintenance of the products; •Our ability to attract and retain qualified personnel; •The extent of our intellectual property protection or our ability to otherwise develop proprietary products and processes;46Table of Contents•Securing sufficient capital resources to expand both our continued research and development, and sales and marketing efforts; and •Obtaining any necessary United States or foreign marketing approvals or clearances. If customers choose not to purchase a CyberKnife or TomoTherapy System or choose to purchase our competitors' products, our revenue andmarket share would be adversely impacted, and there could be a material adverse effect on our business, financial condition and results of operations. Inaddition, companies in the pharmaceutical or biotechnology fields may seek to develop methods of cancer treatment that are more effective than radiationtherapy and radiosurgery, resulting in decreased demand for the TomoTherapy or CyberKnife Systems. Because the CyberKnife and TomoTherapySystems have a long development cycle and because it can take significant time to receive government approvals or clearances for changes to theCyberKnife and TomoTherapy Systems, we must anticipate changes in the marketplace and the direction of technological innovation. Accordingly, if weare unable to anticipate and keep pace with new innovations in the cancer treatment market, the CyberKnife or TomoTherapy Systems or an aspect oftheir functionality may be rendered obsolete, which would have a material adverse effect on our business, financial condition and results of operations.In addition, some of our competitors may compete by changing their pricing model or by lowering the price of their conventional radiation therapysystems or ancillary supplies. If such pricing strategies are implemented, there could be downward pressure on the price of radiation therapy andradiosurgery systems. If we are unable to maintain or increase our selling prices, our gross margins will decline, and there could be a material adverseeffect on our business, financial condition and results of operations.If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results.As a result, current and potential stockholders could lose confidence in our financial reporting, which could have an adverse effect on ourbusiness and our stock price. Effective internal controls are necessary for us to provide reliable financial reports and to protect from fraudulent, illegal or unauthorizedtransactions. If we cannot provide effective controls and reliable financial reports, our business and operating results could be harmed. Our managementdetermined, as of June 30, 2011, that we had material weaknesses in our internal control over financial reporting and that our disclosure controls andprocedures were not effective. See Item 9A of this Annual Report on Form 10-K. A failure to implement and maintain effective internal control over financial reporting, including a failure to implement corrective actions to addressthe control deficiencies identified above, could result in a material misstatement of our financial statements or otherwise cause us to fail to meet ourfinancial reporting obligations. This, in turn, could result in a loss of investor confidence in the accuracy and completeness of our financial reports,which could have an adverse effect on our business and operating results and our stock price, and we could be subject to stockholder litigation. Inaddition, remedying this material weakness may require significant additional financial and managerial resources.We may have difficulties in determining the effectiveness of our internal control due to our complex financial model. The complexity of our financial model contributes to our need for effective financial reporting systems and internal controls. We recognize revenuefrom a range of transactions including CyberKnife and TomoTherapy System sales, our shared ownership program and services. The CyberKnife andTomoTherapy Systems are complex products that contain both hardware and software elements. The complexity of the CyberKnife and TomoTherapySystems and of our financial model pertaining to revenue recognition requires us to process a broader range of financial transactions than would berequired by a company with a less complex financial model. Accordingly, deficiencies or weaknesses in our internal controls would likely impact usmore significantly than they would impact a company with47Table of Contentsa less complex financial model. If we were to find that our internal controls were deficient, we could be required to amend or restate historical or proforma financial statements, which would likely have a negative impact on our stock price. Our management determined, as of June 30, 2011, that wehad a material weakness in our internal control over financial reporting and that our disclosure controls and procedures were not effective. See Item 9Aof this Annual Report on Form 10-K.Our reliance on single source suppliers for critical components of the CyberKnife and TomoTherapy Systems could harm our ability to meetdemand for our products in a timely and cost effective manner. We currently depend on single source suppliers for some of the critical components necessary for the assembly of the CyberKnife andTomoTherapy System, including, with respect to the CyberKnife System, the robotic manipulator, imaging plates, treatment table, robotic couch andmagnetron, which creates the microwaves for use in the linac, and, with respect to the TomoTherapy Systems, the ring gantry, the solid state modulator,the radiation detector and the magnetron. If any single source suppliers were to cease delivering components to us or fail to provide the components toour specifications and on a timely basis, we might be required to find alternative sources for these components. We may have difficulty or be unable tofind alternative sources for these components. As a result, we may be unable to meet the demand for the CyberKnife or TomoTherapy Systems, whichcould harm our ability to generate revenue and damage our reputation. Even if we do find alternate suppliers, we will be required to qualify any suchalternate suppliers and we would likely experience a lengthy delay in our manufacturing processes or a cessation in production, which would result indelays of shipment to end users. We cannot assure you that our single source suppliers will be able or willing to meet our future demands. We generally do not maintain large volumes of inventory, which makes us even more susceptible to harm if a single source supplier fails to delivercomponents on a timely basis. Furthermore, if we are required to change the manufacturer of a critical component of the CyberKnife or TomoTherapySystems, we will be required to verify that the new manufacturer maintains facilities, procedures and operations that comply with our quality andapplicable regulatory requirements. We also will be required to assess the new manufacturer's compliance with all applicable regulations and guidelines,which could further impede our ability to manufacture our products in a timely manner. If the change in manufacturer results in a significant change tothe product, a new 510(k) clearance would be necessary, which would likely cause substantial delays. The disruption or termination of the supply ofkey components for the CyberKnife or TomoTherapy Systems could harm our ability to manufacture our products in a timely manner or within budget,harm our ability to generate revenue, lead to customer dissatisfaction and damage our reputation.It is difficult and costly to protect our intellectual property and our proprietary technologies, and we may not be able to ensure their protection. Our success depends significantly on our ability to obtain, maintain and protect our proprietary rights to the technologies used in our products.Patents and other proprietary rights provide uncertain protections, and we may be unable to protect our intellectual property. For example, we may beunsuccessful in defending our patents and other proprietary rights against third party challenges. As key patents expire, our ability to preventcompetitors from copying our technology may be limited. In addition to patents, we rely on a combination of trade secrets, copyright and trademark laws, nondisclosure agreements and other contractualprovisions and technical security measures to protect our intellectual property rights. These measures may not be adequate to safeguard the technologyunderlying our products. If these measures do not protect our rights adequately, third parties could use our technology, and our ability to compete in themarket would be reduced. Although we have attempted to obtain patent coverage for our technology where available and appropriate, there are aspectsof the technology for which patent coverage was never sought or never received. There are also48Table of Contentscountries in which we sell or intend to sell the CyberKnife or TomoTherapy Systems but have no patents or pending patent applications. Our ability toprevent others from making or selling duplicate or similar technologies will be impaired in those countries in which we have no patent protection.Although we have several issued patents in the United States and in foreign countries protecting aspects of the CyberKnife and TomoTherapy Systems,our pending United States and foreign patent applications may not issue, may issue only with limited coverage or may issue and be subsequentlysuccessfully challenged by others and held invalid or unenforceable. Similarly, our issued patents and those of our licensors may not provide us with any competitive advantages. Competitors may be able to designaround our patents or develop products which provide outcomes comparable or superior to ours. Our patents may be held invalid or unenforceable as aresult of legal challenges by third parties, and others may challenge the inventorship or ownership of our patents and pending patent applications. Inaddition, the laws of some foreign countries may not protect our intellectual property rights to the same extent as do the laws of the United States. In theevent a competitor infringes upon our patent or other intellectual property rights, enforcing those rights may be difficult and time consuming. Even ifsuccessful, litigation to enforce our intellectual property rights or to defend our patents against challenge could be expensive and time consuming andcould divert our management's attention from our core business. We may not have sufficient resources to enforce our intellectual property rights or todefend our patents against a challenge. In addition, we may not prevail in any lawsuits that we initiate, and the damages or other remedies awarded, ifany, may not be commercially valuable. Litigation also puts our patents at risk of being invalidated or interpreted narrowly and our patent applications atrisk of not issuing. Additionally, we may provoke third parties to assert claims against us. We also license patent and other proprietary rights to aspects of our technology to third parties in fields where we currently do not operate as wellas in fields where we currently do operate. Disputes with our licensees may arise regarding the scope and content of these licenses. Further, our abilityto expand into additional fields with our technologies may be restricted by our existing licenses or licenses we may grant to third parties in the future. In October 2006, January 2007 and February 2007, we received correspondence from American Science and Engineering, Inc., or AS&E,expressing concerns that we may be using certain intellectual property we acquired from AS&E through the HES acquisition in a manner that breaches,or may breach, our contractual obligations under a license agreement with them in certain non-medical fields. The intellectual property at issue relates tothe development of a next-generation linac that could be used for medical as well as non-medical purposes. We are developing the technology used inthe next-generation linac independently from the intellectual property we obtained from the HES acquisition. In January of 2010, we entered into aSupply Agreement with AS&E, pursuant to which AS&E has acknowledged and agreed that our use of the intellectual property at issue did not breachor contravene the license agreement. The policies we have in place to protect our trade secrets may not be effective in preventing misappropriation of our trade secrets by others. Inaddition, confidentiality agreements executed by our employees, consultants and advisors may not be enforceable or may not provide meaningfulprotection for our trade secrets or other proprietary information in the event of unauthorized use or disclosure. Litigating a trade secret claim isexpensive and time consuming, and the outcome is unpredictable. In addition, courts outside the United States are sometimes less willing to protect tradesecrets. Moreover, our competitors may independently develop equivalent knowledge methods and know-how. If we are unable to protect ourintellectual property rights, we may be unable to prevent competitors from using our own inventions and intellectual property to compete against us, andour business may be harmed.49Table of ContentsWe may be subject to claims that our employees have wrongfully used or disclosed alleged trade secrets of their former employers. As is common in the medical device industry, we employ individuals who were previously employed at other medical equipment or biotechnologycompanies, including our competitors or potential competitors. We may be subject to claims that we or these employees have inadvertently or otherwiseused or disclosed trade secrets or other proprietary information of their former employers. Litigation may be necessary to defend or against these claims.For example, on September 3, 2009, Best Medical International, Inc. ("Best Medical") filed a lawsuit against the Company in the U.S. District Court forthe Western District of Pennsylvania, claiming the Company induced certain individuals to leave the employment of Best Medical and join the Companyin order to gain access to Best Medical's confidential information and trade secrets. We filed a motion for summary judgment on May 20, 2011. BestMedical filed a response on June 21, 2011, and we filed a response to their response on July 8, 2011. We are now awaiting a ruling by the court. BestMedical is seeking monetary damages and other relief. Even if we are successful in defending against claims of this nature, litigation could result insubstantial costs and be a distraction to management.Third parties may claim we are infringing their intellectual property, and we could suffer significant litigation or licensing expenses or beprevented from selling our product. The medical device industry is characterized by a substantial amount of litigation over patent and other intellectual property rights. In particular, thefield of radiation treatment of cancer is well established and crowded with the intellectual property of competitors and others. We also expect that otherparticipants will enter the field. A number of companies in our market, as well as universities and research institutions, have issued patents and havefiled patent applications which relate to the use of radiation therapy and stereotactic radiosurgery to treat cancerous and benign tumors. Determining whether a product infringes a patent involves complex legal and factual issues, and the outcome of patent litigation actions is oftenuncertain. We have not conducted an extensive search of patents issued to third parties, and no assurance can be given that third party patents containingclaims covering our products, parts of our products, technology or methods do not exist, have not been filed, or could not be filed or issued. Because ofthe number of patents issued and patent applications filed in our technical areas or fields, our competitors or other third parties may assert that ourproducts and the methods we employ in the use of our products are covered by United States or foreign patents held by them. For example, onAugust 6, 2010, Best Medical International, Inc., or Best Medical, filed a lawsuit against Accuray in the U.S. District court for the Western District ofPennsylvania, claiming Accuray has infringed U.S. Patent No. 5,596,619, a patent that Best Medical alleges protects a method and apparatus forconformal radiation therapy, and on December 16, 2010, Best Medical filed an amended complaint, claiming that the Company also infringes U.S.Patent Nos. 6,038,283 and 7,266,175, both of which Best Medical alleges cover methods and apparatus for conformal radiation therapy. On March 9,2011, the Court dismissed with prejudice all counts against the Company, except for two counts of alleged willful infringement of two of the patents.The Court issued a Scheduling Order on May 12, 2011 appointing a special master for claim construction, and setting a claim construction hearing onJanuary 10, 2012. Best Medical moved to voluntarily dismiss one of the two remaining patents on June 28, 2011, which the court granted on June 30,2011, leaving only one patent at issue in the case. On September 1, 2011, the Court modified its Scheduling Order, setting a claim construction hearingon January 24-25, 2012. Best Medical is seeking declaratory and injunctive relief as well as unspecified compensatory and treble damages and otherrelief. In addition, because patent applications can take many years to issue and because publication schedules for pending applications vary byjurisdiction, there may be applications now pending of which we are unaware, and which may result in issued patents which our current or futureproducts infringe. Also, because the claims of published patent applications can change between publication and patent50Table of Contentsgrant, there may be published patent applications that may ultimately issue with claims that we infringe. There could also be existing patents that one ormore of our products or parts may infringe and of which we are unaware. As the number of competitors in the market for less invasive cancer treatmentalternatives grows, and as the number of patents issued in this area grows, the possibility of patent infringement claims against us increases. Regardlessof the merit of infringement claims, they can be time-consuming, result in costly litigation and diversion of technical and management personnel. Someof our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantially greaterresources. In addition, any uncertainties resulting from the initiation and continuation of any litigation could have a material adverse effect on our abilityto raise the funds necessary to continue our operations. In the event that we become subject to a patent infringement or other intellectual property lawsuit and if the relevant patents or other intellectualproperty were upheld as valid and enforceable and we were found to infringe or violate the terms of a license to which we are a party, we could beprevented from selling our products unless we could obtain a license or were able to redesign the product to avoid infringement. Required licenses maynot be made available to us on acceptable terms or at all. If we were unable to obtain a license or successfully redesign our system, we might beprevented from selling our system. If there is an allegation or determination that we have infringed the intellectual property rights of a competitor orother person, we may be required to pay damages, or a settlement or ongoing royalties. In these circumstances, we may be unable to sell our products atcompetitive prices or at all, our business and operating results could be harmed.We could become subject to product liability claims, product recalls, other field actions and warranty claims that could be expensive, divertmanagement's attention and harm our business. Our business exposes us to potential liability risks that are inherent in the manufacturing, marketing and sale of medical device products. We maybe held liable if a CyberKnife or TomoTherapy System causes injury or death or is found otherwise unsuitable during usage. Our products incorporatesophisticated components and computer software. Complex software can contain errors, particularly when first introduced. In addition, new products orenhancements may contain undetected errors or performance problems that, despite testing, are discovered only after installation. Because our productsare designed to be used to perform complex surgical and therapeutic procedures involving delivery of radiation to the body, defects, even if small, couldresult in a number of complications, some of which could be serious and could harm or kill patients. Any weaknesses in training and services associatedwith our products may also be subject to product liability lawsuits. It is also possible that defects in the design, manufacture or labeling of our productsmight necessitate a product recall or other field corrective action, which may result in warranty claims beyond our expectations and may harm ourreputation and create bad publicity. A product liability claim, regardless of its merit or eventual outcome, could result in significant legal defense costs.We may also be subject to claims for property damage or economic loss related to, or resulting from, any errors or defects in our products, or theinstallation, servicing and support of our products, or any professional services rendered in conjunction with our products. The coverage limits of ourinsurance policies may not be adequate to cover future claims. If sales of our products increase or we suffer future product liability claims, we may beunable to maintain product liability insurance in the future at satisfactory rates or with adequate amounts. A product liability claim, any product recalls orother field actions or excessive warranty claims, whether arising from defects in design or manufacture or labeling, could negatively affect our sales orrequire a change in the design, manufacturing process or the indications for which the CyberKnife or TomoTherapy Systems may be used, any of whichcould harm our reputation and business and result in a decline in revenue.51Table of Contents In addition, if a product we designed or manufactured is defective, whether due to design or manufacturing, or labeling defects, improper use of theproduct or other reasons, we may be required to notify regulatory authorities and/or to recall the product, possibly at our expense. We have voluntarilyconducted recalls and product corrections in the past, including two such recalls for the CyberKnife System, and four such recalls for the TomoTherapysystem, during fiscal 2011. Each of these recalls was initiated by Accuray or TomoTherapy. The probability of serious adverse health consequencesfrom these recalls is considered remote, and the costs associated with each such recall were not material. A required notification to a regulatory authorityor recall could result in an investigation by regulatory authorities of our products, which could in turn result in required recalls, restrictions on the sale ofthe products or other civil or criminal penalties. The adverse publicity resulting from any of these actions could cause customers to review andpotentially terminate their relationships with us. These investigations or recalls, especially if accompanied by unfavorable publicity or termination ofcustomer contracts, could result in our incurring substantial costs, losing revenues and damaging our reputation, each of which would harm ourbusiness.The safety and efficacy of our products for certain uses is not yet supported by long-term clinical data, and our products may therefore prove to beless safe and effective than initially thought. Although we believe that the CyberKnife and TomoTherapy Systems have advantages over competing products and technologies, we do not havesufficient clinical data demonstrating these advantages for all tumor indications. For example, because our CyberKnife procedures are relatively new, wehave limited clinical data relating to the effectiveness of the CyberKnife System as a means of controlling the growth of cancer at a particular body site.In addition, we have only limited five-year patient survival rate data, which is a common long-term measure of clinical effectiveness in cancer treatment.Further, future patient studies or clinical experience may indicate that treatment with the CyberKnife System does not improve patient survival oroutcomes. Likewise, because the TomoTherapy System has only been on the market since 2003, we have limited complication or patient survival rate datawith respect to treatment using the system. In addition, while the effectiveness of radiation therapy is well understood, there is a growing but still limitednumber of peer-reviewed medical journal publications regarding the efficacy of highly conformal treatment such as that delivered by the TomoTherapySystem. If future patient studies or clinical experience do not support our beliefs that the TomoTherapy System offers a more advantageous treatmentfor a wide variety of cancer types, use of the system could fail to increase or could decrease, and our business would therefore be adversely affected. Such results could slow the adoption of our products by physicians, significantly reduce our ability to achieve expected revenues and could preventus from becoming profitable. In addition, if future results and experience indicate that our products cause unexpected or serious complications or otherunforeseen negative effects, the FDA could rescind our clearances, our reputation with physicians, patients and others may suffer and we could besubject to significant legal liability.The CyberKnife System has been in use for a limited period of time for uses outside the brain, and the medical community has not yet developed alarge quantity of peer-reviewed literature that supports safe and effective use in those locations in the body. The CyberKnife System was initially cleared by a number of regulatory authorities for the treatment of tumors in the brain and neck. More recently,the CyberKnife System has been cleared in the United States to treat tumors anywhere in the body where radiation is indicated, and our future growth isdependent in large part on continued growth in full body use of the system. Currently, however, there are a limited number of peer-reviewed medicaljournal publications regarding the safety and efficacy of the CyberKnife System for treatment of tumors outside the brain or spine. If later studies showthat the CyberKnife system is less effective or less safe with respect to particular types of52Table of Contentssolid tumors, or in the event clinical studies do not achieve the results anticipated at the outset of the study, use of the CyberKnife System could fail toincrease or could decrease and our growth and operating results would therefore be harmed.Any failure in our physician training efforts could result in potential liabilities. We rely on physicians to devote adequate time to learn to use our products. If physicians are not properly trained, they may misuse or ineffectivelyuse our products. This may result in unsatisfactory patient outcomes, patient injury and related liability or negative publicity which could have anadverse effect on our product sales.International sales of our products account for a significant portion of our revenue, which exposes us to risks inherent in internationaloperations. Our international sales have increased over the last four fiscal years. The percentage of our revenue derived from sales outside of the United Stateswas 45% in 2011, 34% in 2010, and 27% in 2009. To accommodate our international sales, we have invested significant financial and managementresources to develop an international infrastructure that will meet the needs of our customers. We anticipate that a significant portion of our revenue willcontinue to be derived from sales of our products in foreign markets and that the percentage of our overall revenue that is derived from these marketsmay continue to increase. This revenue and related operations will therefore continue to be subject to the risks associated with international operations,including:•Economic or political instability; •Shipping delays; •Changes in foreign regulatory laws governing, among other matters, the clearance, approval and sales of medical devices; •The potential failure to comply with foreign regulatory requirements to market our products on a timely basis or at all; •Difficulties in enforcing agreements with and collecting receivables from customers outside the United States; •Longer payment cycles associated with many customers outside the United States; •Adequate coverage and reimbursement for the CyberKnife and TomoTherapy treatment procedures outside the United States; •Failure of local laws to provide the same degree of protection against infringement of our intellectual property; •Protectionist laws and business practices that favor local competitors; •The possibility that foreign countries may impose additional taxes, tariffs or other restrictions on foreign trade; •Failure of Accuray employees or distributors to comply with export laws and requirements which may result in civil or criminal penaltiesand restrictions on our ability to export our products; •The expense and difficulty of establishing and managing facilities and operations in foreign markets; •Building an organization capable of supporting geographically dispersed operations; •Risks relating to foreign currency, including fluctuations in foreign currency exchange rates; and53Table of Contents•Contractual provisions governed by foreign laws and various trade restrictions, including U.S. prohibitions and restrictions on exportsof certain products and technologies to certain nations. Our inability to overcome these obstacles could harm our business, financial condition and operating results. Even if we are successful inmanaging these obstacles, our partners internationally are subject to these same risks and may not be able to manage these obstacles effectively. Our international operations are also subject to laws regarding the conduct of business overseas, such as the U.S. Foreign Corrupt Practices Act,or FCPA, and the recently adopted U.K. Bribery Act of 2010. The FCPA prohibits the provision of illegal or improper inducements to foreigngovernment officials in connection with the obtaining of business overseas. Violations of the FCPA or other similar laws by us or any of ouremployees, executive officers, distributors or other agents could subject us or the individuals involved to criminal or civil liability and could thereforematerially harm our business. In addition, future imposition of, or significant increases in, the level of customs duties, export quotas, regulatory restrictions or trade restrictionscould materially harm our business.Our results may be impacted by changes in foreign currency exchange rates. Currently, the majority of our international sales are denominated in U.S. dollars. As a result, an increase in the value of the U.S. dollar relative toforeign currencies could require us to reduce our sales price or make our products less competitive in international markets. Also, if our internationalsales increase, we may enter into a greater number of transactions denominated in non-U.S. dollars, which would expose us to foreign currency risks,including changes in currency exchange rates. If we are unable to address these risks and challenges effectively, our international operations may not besuccessful and our business would be materially harmed.We depend on third-party distributors to market and distribute our products in international markets. If our distributors fail to successfullymarket and distribute our products, our business will be materially harmed. We depend on a limited number of distributors in our international markets. We have maintained both the distributors we had prior to theacquisition of TomoTherapy as well as TomoTherapy's distributors, as product-specific distributors of our systems. We are evaluating whether toconsolidate distribution channels in the jurisdictions in which we have multiple distributors. We cannot control the efforts and resources our third-partydistributors will devote to marketing the CyberKnife or TomoTherapy Systems. Our distributors may not be able to successfully market and sell theCyberKnife or TomoTherapy Systems, may not devote sufficient time and resources to support the marketing and selling efforts and may not market theCyberKnife or TomoTherapy Systems at prices that will permit the product to develop, achieve or sustain market acceptance. In some jurisdictions, werely on our distributors to manage the regulatory process and we are dependent on their ability to do so effectively. For example, our regulatoryapproval in Japan was suspended for a period of twelve months during 2003 as a result of a failure of our former CyberKnife System distributor tocoordinate product modifications and obtain necessary regulatory clearances in a timely manner. As a result, the CyberKnife System was recalled inJapan and our former Japanese distributor was told to stop selling the CyberKnife System. In response, we retained a regulatory consultant who wasnot affiliated with our former Japanese distributor and worked with the Japanese Ministry of Health, Labor and Welfare and applied for, and received,approval to sell an updated version of the CyberKnife System under the name of CyberKnife II in Japan. By working with a new distributor, ChiyodaTechnol Corporation, we were able to begin distributing the CyberKnife II System in 2004 with no probationary period. In addition, if a distributor isterminated by us or goes out of business, it may take us a period of time to locate an alternative distributor, to seek appropriate regulatory approvals andto train its personnel to market the CyberKnife or TomoTherapy Systems, and our ability to sell and service the CyberKnife or TomoTherapy Systemsin the region formerly serviced by such terminated distributor could be54Table of Contentsmaterially adversely affected. Any of these factors could materially adversely affect our revenue from international markets, increase our costs in thosemarkets or damage our reputation. If we are unable to attract additional international distributors, our international revenue may not grow. If ourdistributors experience difficulties, do not actively market the CyberKnife or TomoTherapy Systems or do not otherwise perform under our distributionagreements, our potential for revenue and gross margins from international markets may be dramatically reduced, and our business could be harmed.Finally, our efforts to consolidate distributors, if any, may not prove to be successful and may adversely affect our business, financial condition andresults of operations.We have limited experience and capability in manufacturing. If we encounter manufacturing problems, or if our manufacturing facilities do notcontinue to meet federal, state or foreign manufacturing standards, we may be required to temporarily cease all or part of our manufacturingoperations, which would result in delays and lost revenue. The CyberKnife and TomoTherapy Systems are complex, and require the integration of a number of components from several sources of supply.We must manufacture and assemble these complex systems in commercial quantities in compliance with strictly enforced regulatory requirements and atan acceptable cost. We have a limited history of manufacturing commercial quantities of the CyberKnife and TomoTherapy Systems. In particular, wemanufacture compact linacs as a component of the CyberKnife and TomoTherapy Systems. Our linac components are extremely complex devices andrequire significant expertise to manufacture, and as a result of our limited manufacturing experience we may have difficulty producing needed materialsin a commercially viable manner. We may encounter difficulties in scaling up production of the CyberKnife or TomoTherapy Systems, includingproblems with quality control and assurance, component supply shortages, increased costs, shortages of qualified personnel and/or difficultiesassociated with compliance with local, state, federal and foreign regulatory requirements. If our manufacturing capacity does not keep pace with productdemand, we will not be able to fulfill orders in a timely manner which in turn may have a negative effect on our financial results and overall business.Conversely, if demand for our products decreases, the fixed costs associated with excess manufacturing capacity may adversely affect our financialresults. Our manufacturing processes and the manufacturing processes of our third-party suppliers are required to comply with the FDA's Quality SystemRegulation, or QSR. The QSR is a complex regulatory scheme that covers the methods and documentation of the design, testing, production processes,controls, manufacturing, labeling, quality assurance, packaging, storage and shipping of our products. Furthermore, we are required to verify that oursuppliers maintain facilities, procedures and operations that comply with our quality requirements. We are also subject to state requirements and licensesapplicable to manufacturers of medical devices, and we are required to comply with International Organization for Standardization, or ISO, qualitysystem standards in order to produce products for sale in Europe, as well as various other foreign laws and regulations. Because our manufacturingprocesses include diagnostic and therapeutic X-ray equipment and laser equipment, we are subject to the electronic product radiation control provisionsof the Federal Food, Drug and Cosmetic Act, which requires that we file reports with the FDA, applicable states and our customers regarding thedistribution, manufacturing and installation of these types of equipment. The FDA enforces the QSR and the electronic product radiation controlprovisions through periodic inspections, some of which may be unannounced. We have been, and anticipate in the future to be, subject to suchinspections. FDA inspections usually occur every two to three years. During such inspections, the FDA may issue Inspectional Observations on FormFDA 483, listing instances where the manufacturer has failed to comply with applicable regulations and procedures, or warning letters. Our Sunnyvalefacility, where we manufacture the CyberKnife System, was most recently inspected by the FDA in 2011. The 2011 inspection resulted in severalobservations. The initial classification of the inspection is considered to be Voluntary Action Indicated. We have undertaken corrective action inresponse to the FDA's observations.55Table of Contents If a manufacturer does not adequately address the observations, the FDA may take enforcement action against the manufacturer, including theimposition of fines, restriction of the ability to export product, total shutdown of production facilities and criminal prosecution. If we or a third-partysupplier receive a Form FDA 483 classified as Official Action Indicated, fail to pass a QSR inspection, or fail to comply with these, ISO and otherapplicable regulatory requirements, our operations could be disrupted and our manufacturing operations could be delayed. Our failure to take promptand satisfactory corrective action in response to an adverse inspection or our failure to comply with applicable standards could result in enforcementactions, including a public warning letter, a shutdown of our manufacturing operations, a recall of our products, civil or criminal penalties, or othersanctions, which would cause our sales and business to suffer. In addition, because some foreign regulatory approvals are based on approvals orclearances from the FDA, any failure to comply with FDA requirements may also disrupt our sales of products in other countries. We cannot assureyou that the FDA or other governmental authorities would agree with our interpretation of applicable regulatory requirements or that we or our third-party suppliers have in all instances fully complied with all applicable requirements. If any of these events occurs, our reputation could be harmed, wecould lose customers and there could be a material adverse effect on our business, financial condition and results of operations. If we cannot achieve the required level and quality of production, we may need to outsource production or rely on licensing and other arrangementswith third parties who possess sufficient manufacturing facilities and capabilities in compliance with regulatory requirements. Even if we couldoutsource needed production or enter into licensing or other third party arrangements, this could reduce our gross margin and expose us to the risksinherent in relying on others. We also cannot assure you that our suppliers will deliver an adequate supply of required components on a timely basis orthat they will adequately comply with the QSR. Failure to obtain these components on a timely basis would disrupt our manufacturing processes andincrease our costs, which would harm our operating results.We depend on key employees, the loss of whom would adversely affect our business. If we fail to attract and retain employees with the expertiserequired for our business, we may be unable to continue to grow our business. We are highly dependent on the members of our senior management, operations and research and development staff. Our future success willdepend in part on our ability to retain these key employees and to identify, hire and retain additional personnel. Competition for qualified personnel inthe medical device industry, particularly in northern California and in Madison, Wisconsin, is intense, and finding and retaining qualified personnel withexperience in our industry is very difficult. We believe there are only a limited number of individuals with the requisite skills to serve in many of ourkey positions and we compete for key personnel with other medical equipment and software manufacturers and technology companies, as well asuniversities and research institutions. It is increasingly difficult to hire and retain these persons, and we may be unable to replace key persons if theyleave or fill new positions requiring key persons with appropriate experience. A significant portion of our compensation to our key employees is in theform of stock option grants. A prolonged depression in our stock price could make it difficult for us to retain our employees and recruit additionalqualified personnel. We do not maintain, and do not currently intend to obtain, key employee life insurance on any of our personnel. If we fail to hireand retain personnel in key positions, we may be unable to continue to grow our business successfully.If we do not effectively manage our growth, our business may be significantly harmed. In order to implement our business strategy, we expect continued growth in our infrastructure requirements, particularly as we expand ourmanufacturing and research and development capacities. To manage our growth, we must expand our facilities, augment our management, operationaland56Table of Contentsfinancial systems, hire and train additional qualified personnel, scale-up our manufacturing capacity and expand our marketing and distributioncapabilities. Our manufacturing, assembly and installation process is complex and occurs over many months, and we must effectively scale this entireprocess to satisfy customer expectations and changes in demand. Further, to accommodate our growth and compete effectively, we will be required toimprove our information systems. We cannot be certain that our personnel, systems, procedures and internal controls will be adequate to support ourfuture operations. If we cannot manage our growth effectively, our business will suffer.Changes in interpretation or application of generally accepted accounting principles may adversely affect our operating results. We prepare our financial statements to conform with Generally Accepted Accounting Principles. These principles are subject to interpretation bythe Financial Accounting Standards Board, American Institute of Certified Public Accountants, the Public Company Accounting Oversight Board, theSecurities and Exchange Commission and various other regulatory or accounting bodies. A change in interpretations of, or our application of, theseprinciples can have a significant effect on our reported results and may even affect our reporting of transactions completed before a change isannounced. Additionally, as we are required to adopt new accounting standards, our methods of accounting for certain items may change, which couldcause our results of operations to fluctuate from period to period. For example, due to the significance of the software component in certain of ourproducts, we are currently bound by the software revenue recognition rules for a portion of our business. We adopted ASU 2009-13 and ASU 2009-14in the first quarter of fiscal 2011 and the impact of the adoption of ASU 2009-13 and ASU 2009-14 on our consolidated financial statements has beenassessed at Note 2, Summary of Significant Accounting Policies. The application of different types of accounting principles and related potential changesmay make it more difficult to compare our financial results from quarter to quarter, and the trading price of our common stock could suffer or becomemore volatile as a result.As a strategy to assist our sales efforts, we may offer extended payment terms, which may potentially result in higher Days Sales Outstanding andgreater payment defaults. We offer longer or extended payment terms for qualified customers in some circumstances. As of June 30, 2011, customer contracts with extendedpayment terms of more than one year amounted to less than 2% of our accounts receivable balance. While we qualify customers to whom we offerlonger or extended payment terms, their financial positions may change adversely over the longer time period given for payment. This may result in anincrease in payment defaults, which would affect our net earnings. Also, longer or extended payment terms have, and may in the future, result in anincrease in our days sales outstanding, or DSO.Our ability to raise capital in the future may be limited, and our failure to raise capital when needed could prevent us from executing our growthstrategy. While we believe that our existing cash and short-term and long-term investments will be sufficient to meet our anticipated cash needs for at leastthe next twelve months, the timing and amount of our working capital and capital expenditure requirements may vary significantly depending onnumerous factors, including the other risk factors described above and below, as well as:•Market acceptance of our products; •The need to adapt to changing technologies and technical requirements; •Our ability to continue to increase orders growth and revenue, manage expenses and integrate the TomoTherapy business;57Table of Contents•Our ability to improve service margins; •The existence of opportunities for expansion; and •Access to and availability of sufficient management, technical, marketing and financial personnel. If our capital resources are insufficient to satisfy our liquidity requirements, we may seek to sell additional equity securities or debt securities orobtain other debt financing, which could be difficult or impossible in the current economic and capital markets environments. Our debt levels mayimpair our ability to obtain additional financing in the future. The sale of additional equity securities or convertible debt securities would result inadditional dilution to our stockholders. We cannot assure that additional financing, if required, will be available in amounts or on terms acceptable to us,if at all.We may attempt to acquire new businesses, products or technologies, or enter into strategic collaborations or alliances, and if we are unable tosuccessfully complete these acquisitions or to integrate acquired businesses, products, technologies or employees, we may fail to realize expectedbenefits or harm our existing business. Our success will depend, in part, on our ability to expand our product offerings and grow our business in response to changing technologies,customer demands and competitive pressures. In some circumstances, we may determine to do so through the acquisition of complementary businesses,products or technologies, or through collaborating with complementary businesses, rather than through internal development. The identification ofsuitable acquisition or alliance candidates can be difficult, time consuming and costly, and we may not be able to successfully complete identifiedacquisitions or alliances. Other companies may compete with us for these strategic opportunities. Furthermore, even if we successfully complete anacquisition or alliance, we may not be able to successfully integrate newly acquired organizations, products or technologies into our operations, and theprocess of integration could be expensive, time consuming and may strain our resources, and we may not realize the expected benefits of anyacquisition, collaboration or strategic alliance. Furthermore, the products and technologies that we acquire or with respect to which we collaborate maynot be successful, or may require significantly greater resources and investments than we originally anticipated. In addition, we may be unable to retainemployees of acquired companies, or retain the acquired company's customers, suppliers, distributors or other partners who are our competitors or whohave close relationships with our competitors. Consequently, we may not achieve anticipated benefits of the acquisitions or alliances which could harmour existing business. In addition, future acquisitions or alliances could result in potentially dilutive issuances of equity securities or the incurrence ofdebt, contingent liabilities or expenses, or other charges such as in-process research and development, any of which could harm our business and affectour financial results or cause a reduction in the price of our common stock.Our liquidity could be adversely impacted by adverse conditions in the financial markets. At June 30, 2011, we had $95.9 million in cash and cash equivalents. The available cash and cash equivalents are held in accounts managed bythird party financial institutions and consist of invested cash and cash in our operating accounts. The invested cash is invested in interest bearing fundsmanaged by third party financial institutions. These funds invest in direct obligations of the government of the United States. To date, we haveexperienced no loss or lack of access to our invested cash or cash equivalents; however, we can provide no assurances that access to our invested cashand cash equivalents will not be impacted by adverse conditions in the financial markets. At any point in time, we also have funds in our operating accounts that are with third party financial institutions that exceed the Federal DepositInsurance Corporation, or FDIC insurance limits. While we monitor daily the cash balances in our operating accounts and adjust the cash balances asappropriate, these cash balances could be impacted if the underlying financial institutions fail or become subject to other adverse conditions in thefinancial markets. To date, we have experienced no loss or lack of access to cash in our operating accounts.58Table of ContentsOur operations are vulnerable to interruption or loss due to natural disasters, epidemics, terrorist acts and other events beyond our control,which would adversely affect our business. We have facilities in countries around the world, including three manufacturing facilities, each of which is equipped to manufacture uniquecomponents of our products. The manufacturing facilities are located in Sunnyvale, California, Madison, Wisconsin and Chengdu, China. We do notmaintain backup manufacturing facilities for all of our manufacturing facilities, so we depend on each of our current facilities for the continued operationof our business. In addition, we conduct a significant portion of other activities, including administration and data processing, at facilities located in theState of California which has experienced major earthquakes in the past, as well as other natural disasters. Chengdu, China, where one of ourmanufacturing facilities is located, has also experienced major earthquakes in the past. We do not carry earthquake insurance. Unexpected events at anyof our facilities, including fires or explosions; natural disasters, such as hurricanes, tornados and earthquakes; war or terrorist activities; unplannedoutages; supply disruptions; and failures of equipment or systems, could significantly disrupt our operations, delay or prevent product manufacture andshipment for the time required to repair, rebuild or replace our manufacturing facilities, which could be lengthy, result in large expenses to repair orreplace the facilities, and adversely affect our results of operation. In addition, the recent earthquake and tsunami in Japan, and other collateral events, including, among others, the catastrophic loss of lives,businesses, infrastructure, and delays in transportation, may have a direct negative impact on us or an indirect impact on us by affecting our employees,customers, or the overall economy in Japan, and as a result, we may experience a reduction in demand for our products and services. In addition, wehave experienced, and may continue to experience, delays in sales to potential customers in Japan. We may also experience delays in installationschedules for, or cancellations of sales to, existing Japanese customers. If installation schedules are delayed or products are not accepted by ourcustomers in a timely manner, our reported revenues may differ materially from expectations. As a result of these events, our revenue and our results ofoperations could be adversely affected.Risks Related to the Regulation of our Products and BusinessHealthcare reform legislation could adversely affect demand for our products, our revenue and our financial condition. Healthcare costs have risen significantly over the past decade. There have been and continue to be proposals by legislators, regulators, and third-party payors to keep these costs down. Certain proposals, if passed, may impose limitations on the coverage or amounts of reimbursement available forour products from governmental agencies or third-party payors. These limitations could have a negative impact on the demand for our products andservices, and therefore on our financial position and results of operations and a material adverse effect on our financial position and results ofoperations. On March 23, 2010, the Patient Protection and Affordable Care Act was signed into law, and on March 30, 2010, the Health Care and EducationReconciliation Act of 2010 was signed into law. Together, the two measures make the most sweeping and fundamental changes to the U.S. health caresystem since the creation of Medicare and Medicaid. The Health Care Reform laws include a large number of health-related provisions to take effectover the next four years, including expanding Medicaid eligibility, requiring most individuals to have health insurance, establishing new regulations onhealth plans, establishing health insurance exchanges, requiring manufacturers to report payments or other transfers of value made to physicians andteaching hospitals, modifying certain payment systems to encourage more cost-effective care and a reduction of inefficiencies and waste and includingnew tools to address fraud and abuse. There continue to be many programs and requirements for which the details have not yet been fully established orconsequences not fully understood, and it is unclear what the full impact of the legislation will be. Effective in 2013, there will be a 2.3% excise tax onU.S. sales59Table of Contentsof medical devices. U.S. net sales represented 55% of our worldwide net sales in 2011, and therefore, this tax burden may have a material, negativeimpact on our results of operations and our cash flow. In addition, various healthcare reform proposals have also emerged at the state level. We cannot predict the exact effect newly enacted laws or anyfuture legislation or regulation will have on us. However, the implementation of new legislation and regulation may materially lower reimbursements forour products, materially reduce medical procedure volumes and significantly and adversely affect our business.Modifications, upgrades and future products related to the CyberKnife or TomoTherapy Systems or new indications may require new FDA 510(k)clearances or premarket approvals, and such modifications, or any defects in design, manufacture or labeling may require us to recall or ceasemarketing the CyberKnife or TomoTherapy Systems until approvals or clearances are obtained. The CyberKnife and TomoTherapy Systems are medical devices that are subject to extensive regulation in the United States by local, state and thefederal government, including by the FDA. The FDA regulates virtually all aspects of a medical device's design, development, testing manufacturing,labeling, storage, record keeping, adverse event, reporting, sale, promotion, distribution and shipping. Before a new medical device, or a new use of orclaim for an existing product, can be marketed in the United States, it must first receive either premarket approval or 510(k) clearance from the FDA,unless an exemption exists. Either process can be expensive and lengthy. The FDA's 510(k) clearance process generally takes from three to twelvemonths, but it can last longer. The process of obtaining premarket approval is much more costly and uncertain than the 510(k) clearance process and itgenerally takes from one to three years, or even longer, from the time the application is filed with the FDA. Despite the time, effort and cost, there canbe no assurance that a particular device or a modification of a device will be approved or cleared by the FDA through either the premarket approvalprocess or 510(k) clearance process. Even if we are granted regulatory clearances or approvals, they may include significant limitations on the indicateduses of the product, which may limit the market for those products. Medical devices may be marketed only for the indications for which they are approved or cleared. The FDA also may change its policies, adoptadditional regulations, or revise existing regulations, each of which could prevent or delay premarket approval or 510(k) clearance of our device, orcould impact our ability to market our currently cleared device. We are also subject to medical device reporting regulations which require us to report tothe FDA if our products cause or contribute to a death or a serious injury, or malfunction in a way that would likely cause or contribute to a death or aserious injury. We also are subject to Quality System regulations. Our products are also subject to state regulations and various worldwide laws andregulations. A component of our strategy is to continue to upgrade the CyberKnife and TomoTherapy Systems. Upgrades previously released by us required510(k) clearance before we were able to offer them for sale. We expect our future upgrades will similarly require 510(k) clearance; however, futureupgrades may be subject to the substantially more time consuming and uncertain premarket approval process. If we were required to use the premarketapproval process for future products or product modifications, it could delay or prevent release of the proposed products or modifications, which couldharm our business. The FDA requires device manufacturers to make their own determination of whether or not a modification requires an approval or clearance;however, the FDA can review a manufacturer's decision not to submit for additional approvals or clearances. Any modification to an FDA approved orcleared device that would significantly affect its safety or efficacy or that would constitute a major change in its intended use would require a newpremarket approval or 510(k) clearance. We cannot assure you that the FDA will agree with our decisions not to seek approvals or clearances forparticular device modifications or that we will be successful in obtaining 510(k) clearances for modifications.60Table of Contents We have obtained 510(k) clearance for the CyberKnife System for the treatment of tumors anywhere in the body where radiation is indicated, andwe have obtained 510(k) clearance for the TomoTherapy Systems to be used as integrated systems for the planning and delivery of IMRT for thetreatment of cancer. The TomoTherapy Systems provide precise delivery of radiation to tumors while minimizing the delivery of radiation to vitalhealthy tissue. The TomoTherapy Systems deliver the radiation therapy, or stereotactic radiotherapy or radiosurgery, treatment in accordance with thephysician approved plan using IMRT techniques delivered in a helical tomographic pattern. We have made modifications to the CyberKnife andTomoTherapy Systems in the past and may make additional modifications in the future that we believe do not or will not require additional approvals orclearances. If the FDA disagrees and requires us to obtain additional premarket approvals or 510(k) clearances for any modifications to the CyberKnifeor TomoTherapy Systems and we fail to obtain such approvals or clearances or fail to secure approvals or clearances in a timely manner, we may berequired to cease manufacturing and marketing the modified device or to recall such modified device until we obtain FDA approval or clearance and wemay be subject to significant regulatory fines or penalties. In addition, even if the CyberKnife and TomoTherapy Systems are not modified, the FDA and similar governmental authorities in other countriesin which we market and sell our products have the authority to require the recall of our products in the event of material deficiencies or defects in design,manufacture or labeling. A government mandated recall, or a voluntary recall by us, could occur as a result of component failures, manufacturing errorsor design defects, including defects in labeling and user manuals. We have voluntarily conducted recalls and product corrections in the past, includingtwo such recalls for the CyberKnife System, and four such recalls for the TomoTherapy system, during fiscal 2011. Each of these recalls was initiatedby Accuray or TomoTherapy. The probability of serious adverse health consequences from these recalls is considered remote, and the costs associatedwith each such recall were not material. We cannot ensure that the FDA will not require that we take additional actions to address problems that resultedin previous recalls. Any recall could divert management's attention, cause us to incur significant expenses, harm our reputation with customers,negatively affect our future sales and business, require redesign of the CyberKnife or TomoTherapy Systems, and harm our operating results. In thesecircumstances, we may also be subject to significant enforcement action. If any of these events were to occur, our ability to introduce new or enhancedproducts in a timely manner would be adversely affected, which in turn would harm our future growth.If we or our distributors do not obtain and maintain the necessary regulatory approvals in a specific country, we will not be able to market andsell our products in that country. To be able to market and sell our products in a specific country, we or our distributors must comply with applicable laws and regulations of thatcountry. In jurisdictions where we rely on our distributors to manage the regulatory process, we are dependent on their ability to do so effectively.While the laws and regulations of some countries do not impose barriers to marketing and selling our products or only require notification, othersrequire that we or our distributors obtain the approval of a specified regulatory body. These laws and regulations, including the requirements forapprovals, and the time required for regulatory review vary from country to country. The governmental agencies regulating medical devices in somecountries, for example, require that the user interface on medical device software be in the local language. We currently provide user guides andmanuals, both paper copies and electronically, in the local language but only provide an English language version of the user interface. Obtainingregulatory approvals is expensive and time-consuming, and we cannot be certain that we or our distributors will receive regulatory approvals in eachcountry in which we market or plan to market our products. If we modify our products, we or our distributors may need to apply for additionalregulatory approvals before we are permitted to sell them. We may not continue to meet the quality and safety standards required to maintain theauthorizations that we or our distributors have received. It can also be costly for us and our distributors to keep up with regulatory changes issued or61Table of Contentsmandated from time to time. If we change distributors, it may be time-consuming and disruptive to our business to transfer the required regulatoryapprovals, particularly if such approvals are maintained by our third-party distributors on our behalf. If we or our distributors are unable to maintain ourauthorizations, or fail to obtain appropriate authorizations in a particular country, we will no longer be able to sell our products in that country, and ourability to generate revenue will be materially adversely affected. Within the European Union, we are required under Medical Device Directive to affix the Conformité Européene, or CE, mark on our products inorder to sell the products in member countries of the EU. This conformity to the applicable directives is done through self declaration and is verified byan independent certification body, called a Notified body, before the CE mark can be placed on the device. Once the CE mark is affixed to the device, theNotified Body will regularly audit us to ensure that we remain in compliance with the applicable European laws or directives. CE marking demonstratesthat our products comply with the laws and regulations required by the European Union countries to allow free movement of trade within thosecountries. If we cannot support our performance claims and/or demonstrate compliance with the applicable European laws and directives, we lose ourCE mark, which would prevent us from selling our products within the European Union. Under the Pharmaceutical Affairs Law in Japan, a pre-market approval necessary to sell, market and import a product, or shonin, must be obtainedfrom the Ministry of Health, Labor and Welfare, or MHLW, for our products. Before issuing approvals, MHLW examines the application in detail withregard to the quality, efficacy, and safety of the proposed medical device. The shonin is granted once MHLW is content with the safety andeffectiveness of the medical device. The time required for approval varies. A delay in approval could prevent us from selling our products in Japan,which could impact our ability to generate revenue and harm our business. In addition to laws and regulations regarding medical devices, we are subject to a variety of environmental laws and regulations regulating ouroperations, including those relating to the use, generation, handling, storage, transportation, treatment and disposal of hazardous materials, which lawsimpose compliance costs on our business and can also result in liability to us. For example, we are in the process of updating the way our products arebuilt such that they will be compliant with the recast Directive on Restriction of the Use of Certain Hazardous Substances in Electrical and ElectronicEquipment, or the RoHS Directive, which applies to medical devices beginning in July 2014. The recast RoHS Directive bans the placing on the EUmarket of new electrical and electronic equipment containing more than certain levels of lead, mercury, cadmium, hexavalent chromium, polybrominatedbiphenyl (PBB) and polybrominated diphenyl ether (PBDE).Future legislative or regulatory changes to the healthcare system may affect our business. In the United States, there have been, and we expect there will continue to be, a number of legislative and regulatory changes and proposals tochange the healthcare system, and some could involve changes that significantly affect our business. In addition, certain federal regulatory changesoccur at least annually. In April 2008, at the time CMS published final 2009 Medicare inpatient reimbursement rates, CMS issued final rules implementing significantamendments to the regulations under the federal Ethics in Patient Referrals Act, which is more commonly known as the Stark Law, with an effectivedate of October 1, 2009. These regulations, among other things, impose additional limitations on the ability of physicians to refer patients to medicalfacilities in which the physician has an ownership interest for treatment. Among other things, the regulations provide that leases of equipment betweenphysician owners that may refer patients and hospitals must be on a fixed rate, rather than a per use, basis. Physician owned entities have increasinglybecome involved in the acquisition of medical technologies, including the CyberKnife and TomoTherapy Systems. In many cases, these entities enter62Table of Contentsinto arrangements with hospitals that bill Medicare for the furnishing of medical services, and the physician owners are among the physicians who referpatients to the entity for services. The regulations limit these arrangements and could require the restructuring of existing arrangements betweenphysicians owned entities and hospitals and may also discourage physicians from participating in the acquisition and ownership of medicaltechnologies. As a result of the finalization of these regulations, some existing CyberKnife and TomoTherapy System operators may have to modify orrestructure their corporate or organizational structures. In addition, certain existing customers that planned to open CyberKnife or TomoTherapy centersin the United States involving physician ownership could also have to restructure. Accordingly, these regulations could reduce the attractiveness ofmedical technology acquisitions, including CyberKnife and TomoTherapy System purchases, by physician-owned joint ventures or similar entities. As aresult, these regulations could have an adverse impact on our product sales and therefore on our business and results of operations. On August 3, 2010, the FDA released for public comment two internal working group reports with numerous recommendations (1) to improve the510(k) process and (2) to utilize science in regulatory decision making in ways that encourage innovation yet maintain predictability. The publiccomment period closed in early October 2010 and the FDA is targeting the implementation of or setting timelines for the implementation of "non-controversial" recommendations in 2011. At the same time, the FDA acknowledges that the recommendations are preliminary and no decisions havebeen made on specific changes to pursue. Nevertheless, we anticipate significant changes will result in the way 510(k) programs will operate and theincreased data requirements, including clinical data, to obtain 510(k) clearance or PMA approval. We cannot predict what effect these reforms will haveon our ability to obtain 510(k) clearances or PMA approvals in a timely manner or the effect on our business. On June 9 and 10, 2010, the FDA held a public meeting entitled "Device Improvements to Reduce the Number of Under-doses, Over-doses, andMisaligned Exposures from Therapeutic Radiation." The expressed purpose of the meeting was to discuss steps that could be taken by manufacturers ofradiation therapy devices to help reduce misadministration and misaligned exposures that have been recently reported in the press. In advance of and atthe meeting, the FDA requested comments in the following areas: features that should be incorporated into radiation therapy devices and their relatedsoftware, user training, and quality assurance measures. It is likely that the FDA will use the information gleaned at this meeting to significantly revisethe standards and requirements for designing, manufacturing and marketing devices such as ours, creating uncertainty in the current regulatoryenvironment around our current products and development of future products. Future legislative or policy initiatives directed at reducing costs could beintroduced at either the federal or state level. We cannot predict what healthcare reform legislation or regulations, if any, will be enacted in the UnitedStates or elsewhere, what impact any legislation or regulations related to the healthcare system that may be enacted or adopted in the future might haveon our business, or the effect of ongoing uncertainty or public perception about these matters will have on the purchasing decisions of our customers. In July, 2011, the Institute of Medicine, or IOM, which was requested by the FDA to evaluate and make recommendations on the 510(k) program,released its report entitled "Medical Devices and the Public Health, the FDA 510(k) Clearance Process.' The report contained numerous and broadrecommendations that, if followed, will have a significant impact on the medical device industry. We cannot predict what effect the recommendations bythe IOM in its report to the FDA will have on the 510(k) program or our ability to obtain 510(k) clearances in a timely manner.63Table of ContentsWe are required to comply with federal and state "fraud and abuse" laws, and if we are unable to comply with such laws, we could facesubstantial penalties and we could be excluded from government healthcare programs, which would adversely affect our business, financialcondition and results of operations. We are directly or indirectly through our customers, subject to various federal, state and foreign laws pertaining to healthcare fraud and abuse.These laws which directly or indirectly affect our ability to operate our business primarily include, but are not limited to, the following:•The federal Anti-Kickback Statute, which prohibits persons from soliciting, offering, receiving or providing remuneration, directly orindirectly, in cash or in kind, to induce either the referral of an individual, or furnishing or arranging for a good or service, for whichpayment may be made under federal healthcare programs such as Medicare and Medicaid; •State law equivalents to the Anti-Kickback Statute, which may not be limited to government reimbursed items; •The Ethics in Patient Referral Act of 1989, also known as the Stark Law, which prohibits, subject to certain exceptions, physicianreferrals of Medicare and Medicaid patients to an entity providing certain "designated health services" if the physician or an immediatefamily member has any financial relationship with the entity. The Stark Law also prohibits the entity receiving the referral from billingfor any good or service furnished pursuant to an unlawful referral; •State law equivalents to the Stark Law, which may provide even broader restrictions and require greater disclosures than the federal law; •The federal False Claims Act, which prohibits the knowing filing or causing the filing of a false claim or the knowing use of falsestatements to obtain payment from the federal government; and •Similar laws in foreign countries where we conduct business. The following arrangements with purchasers and their agents have been identified by the Office of the Inspector General of the Department ofHealth and Human Services as ones raising potential risk of violation of the federal Anti-Kickback Statute:•Discount and free good arrangements that are not properly disclosed or accurately reported to federal healthcare programs; •Product support services, including billing assistance, reimbursement consultation, marketing and other services specifically tied tosupport of the purchased product, offered in tandem with another service or program (such as reimbursement guarantee) that confers abenefit to the purchaser; •Educational grants conditioned in whole or in part on the purchase of equipment, or otherwise inappropriately influenced by sales andmarketing considerations; •Research funding arrangements, particularly post-market research activities, that are linked directly or indirectly to the purchase ofproducts, or otherwise inappropriately influenced by sales and marketing considerations; and •Other offers of remuneration to purchasers that is expressly or impliedly related to a sale or sales volume, such as "prebates" and"upfront payment," other free or reduced-price goods or services, and payments to cover costs of "converting" from a competitor'sproducts, particularly where the selection criteria for such offers vary with the volume or value of business generated. We have various arrangements with physicians, hospitals and other entities which implicate these laws. For example, physicians who own ourstock also provide medical advisory and other consulting and personal services. Similarly, we have a variety of different types of arrangements with our64Table of Contentscustomers. For example, our shared ownership program entails the provision of our products to our customers under a deferred payment program,where we generally receive the greater of a fixed minimum payment or a portion of the revenues of services. Included in the fee we charge for theplacement and shared ownership program are a variety of services, including physician training, educational and marketing support, generalreimbursement guidance and technical support. In the past, we have also provided loans to our customers. We also provide research grants to customersto support customer studies related to, among other things, our CyberKnife and TomoTherapy Systems. Certain of these arrangements do not meetAnti-Kickback Statute safe harbor protections, which may result in increased scrutiny by government authorities having responsibility for enforcingthese laws. If our past or present operations are found to be in violation of any of the laws described above or other similar governmental regulations to whichwe or our customers are subject, we may be subject to the applicable penalty associated with the violation, including significant civil and criminalpenalties, damages, fines, imprisonment and exclusion from the Medicare and Medicaid programs. The impact of any such violations may lead tocurtailment or restructuring of our operations, which could adversely affect our ability to operate our business and our financial results. The risk of ourbeing found in violation of these laws is increased by the fact that many of these laws are open to a variety of interpretations. Any action against us forviolation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses, divert our management's attentionfrom the operation of our business and damage our reputation. If enforcement action were to occur, our reputation and our business and financialcondition may be harmed, even if we were to prevail or settle the action. Similarly, if the physicians or other providers or entities with which we dobusiness are found to be non-compliant with applicable laws, they may be subject to sanctions, which could also have a negative impact on ourbusiness.If we are found to have violated laws protecting the confidentiality of patient health information, we could be subject to civil or criminal penalties,which could increase our liabilities and harm our reputation or our business. There are a number of federal and state laws protecting the confidentiality of certain patient health information, including patient records, andrestricting the use and disclosure of that protected information. In particular, the U.S. Department of Health and Human Services has promulgatedpatient privacy rules under the Health Insurance Portability and Accountability Act of 1996, or HIPAA. These privacy rules protect medical records andother personal health information by limiting their use and disclosure, giving individuals the right to access, amend and seek accounting of their ownhealth information and limiting most uses and disclosures of health information to the minimum amount reasonably necessary to accomplish theintended purpose. Although we are not a covered entity under HIPAA, we have entered into agreements with certain covered entities under which weare considered to be a "business associate" under HIPAA. As a business associate, we are required to implement policies, procedures and reasonableand appropriate security measures to protect individually identifiable health information we receive from covered entities. Our failure to protect healthinformation received from customers could subject us to liability to both the government and the covered entity, adverse publicity, and could harm ourbusiness and impair our ability to attract new customers. The HIPAA privacy standard was recently amended by the Health Information Technology for Economic and Clinical Health Act (HITECH),enacted as part of the American Recovery and Reinvestment Act of 2009. HITECH significantly increases the civil money penalties for violations ofpatient privacy rights protected under HIPAA. Furthermore, as of February 2010, Business Associates who have access to patient health informationprovided by hospitals and healthcare providers are now directly subject to HIPAA, including a new enforcement scheme and inspection requirements.65Table of Contents Certain governmental agencies, such as the U.S. Department of Health and Human Services and the Federal Trade Commission, have the authorityto protect against the misuse of consumer information by targeting companies that collect, disseminate or maintain personal information in an unfair ordeceptive manner. We are also subject to the laws of those foreign jurisdictions in which we sell the CyberKnife and TomoTherapy Systems, some ofwhich currently have more protective privacy laws. If we fail to comply with applicable regulations in this area, our business and prospects could beharmed.Risks Related to Pro Forma Financial InformationOur financial results and backlog may materially differ from the pro forma financial information and backlog presented in this report. Historical proforma financial results included in "Note 12, Acquisition", to the financial statements may not be indicative of future results ofoperations. Our ability to maintain and potentially improve results of operations will be dependent on a variety of factors including the following:•Our success in marketing and selling existing products; •Our ability to improve the reliability of the TomoTherapy Systems; •Our ability to develop new products; and •Our ability to integrate the operations of TomoTherapy with our existing operations. As a result, our results in the future may be different than the results reflected in the historical pro forma resultsRisks Related to Our Common StockThe price of our common stock is volatile and may continue to fluctuate significantly, which could lead to losses for stockholders. The trading prices of the stock of high-technology companies of our size can experience extreme price and volume fluctuations. These fluctuationsoften have been unrelated or out of proportion to the operating performance of these companies. Our stock price has experienced periods of volatility.Broad market fluctuations may also harm our stock price. Any negative change in the public's perception of the prospects of companies that employsimilar technology or sell into similar markets could also depress our stock price, regardless of our actual results. In addition to the other risk factors described above and below, factors affecting the trading price of our common stock include:•Regulatory developments related to manufacturing, marketing or sale of the CyberKnife or TomoTherapy Systems; •Our ability to successfully integrate the TomoTherapy acquisition; •Economic changes and overall market volatility; •Political or social uncertainties; •Changes in product pricing policies; •Variations in our operating results, as well as costs and expenditures; •Changes in our operating results as a result of problems with our internal controls; •Announcements of technological innovations, new services or service enhancements, strategic alliances or significant agreements by usor by our competitors;66Table of Contents•Recruitment or departure of key personnel; •Changes in the estimates of our operating results or changes in recommendations by any securities analyst that elects to follow ourcommon stock; •Market conditions in our industry, the industries of our customers and the economy as a whole; •Sales of large blocks of our common stock; and •Changes in accounting principles or changes in interpretations of existing principles, which could affect our financial results.The acquisition of TomoTherapy may not be accretive and may cause dilution to our earnings per share, which may negatively affect the marketprice of our common stock. We currently anticipate that the acquisition of TomoTherapy will be accretive to our earnings per share (on an adjusted earnings basis) in our fiscalyear beginning July 1, 2012. This expectation is based on current estimates, which may change materially. We may also encounter additionaltransaction-related costs or other factors such as the failure to realize all of the benefits anticipated in the acquisition. All of these factors could causedilution to our earnings per share or decrease or delay the expected accretive effect of the acquisition and cause a decrease in the market price of ourcommon stock.Future issuances of shares of our common stock or substantial sales of our common stock by our stockholders, including sales pursuant to10b5-1 plans, could depress our stock price regardless of our operating results. Any issuance of equity securities could dilute the interests of our stockholders and could substantially decrease the trading price of our commonstock. We may issue equity securities in the future for a number of reasons, including to finance our operations and business strategy (including inconnection with acquisitions, strategic collaborations or other transactions), to adjust our ratio of debt to equity, to satisfy our obligations upon theexercise of outstanding warrants or options or for other reasons. On August 1, 2011, we issued $100 million aggregate principal amount of our 3.75% Convertible Senior Notes due 2016, which we refer to as theNotes. The price of our common stock could also be affected by possible sales of our common stock by investors who view the Notes as a moreattractive means of equity participation in our company or by any hedging or arbitrage trading activity that involves our common stock. To the extent weissue common stock upon conversion of the Notes, that conversion would dilute the ownership interests of our stockholders. Moreover, if our existing stockholders sell a large number of shares of our common stock or the public market perceives that existing stockholdersmight sell shares of common stock, including sales pursuant to 10b5-1 plans, the market price of our common stock could decline significantly. Thesesales might also make it more difficult for us to sell equity securities at a time and price that we deem appropriate.Increased leverage as a result of the Notes offering may harm our financial condition and operating results. As of June 30, 2011, on a pro forma basis to give effect to the sale of the Notes, we would have had total consolidated long-term liabilities ofapproximately $108.7 million, including Notes in the amount of $96.3 million. Our level of indebtedness could have important consequences to you,because:•it could affect our ability to satisfy our obligations under the Notes;67Table of Contents•a substantial portion of our cash flows from operations will have to be dedicated to interest and principal payments and may not beavailable for operations, working capital, capital expenditures, expansion, acquisitions or general corporate or other purposes; •it may impair our ability to obtain additional financing in the future; •it may limit our flexibility in planning for, or reacting to, changes in our business and industry; and •it may make us more vulnerable to downturns in our business, our industry or the economy in general.The conditional conversion features of the Notes, if triggered, may adversely affect our financial condition and operating results. In the event the conditional conversion features of the Notes are triggered, holders of the Notes will be entitled to convert the Notes at any timeduring specified periods at their option. If one or more holders elect to convert their Notes, unless we elect to satisfy our conversion obligation bydelivering solely shares of our common stock (other than paying solely cash in lieu of any fractional share), including if we have irrevocably elected fullphysical settlement upon conversion, we would be required to make cash payments to satisfy all or a portion of our conversion obligation based on theapplicable conversion rate, which could adversely affect our liquidity. In addition, even if holders do not elect to convert their Notes, if we haveirrevocably elected net share settlement upon conversion we could be required under applicable accounting rules to reclassify all or a portion of theoutstanding principal of the Notes as a current rather than long-term liability, which could result in a material reduction of our net working capital.Provisions in the indenture for the Notes, our certificate of incorporation and our bylaws could discourage or prevent a takeover, even if anacquisition would be beneficial in the opinion of our stockholders. Provisions of our certificate of incorporation and bylaws could make it more difficult for a third party to acquire us, even if doing so would bebeneficial in the opinion of our stockholders. These provisions include:•Authorizing the issuance of "blank check" preferred stock that could be issued by our board of directors to increase the number ofoutstanding shares and thwart a takeover attempt; •Establishing a classified board of directors, which could discourage a takeover attempt; •Prohibiting cumulative voting in the election of directors, which would limit the ability of less than a majority of stockholders to electdirector candidates; •Limiting the ability of stockholders to call special meetings of stockholders; •Prohibiting stockholder action by written consent and requiring that all stockholder actions be taken at a meeting of our stockholders; and•Establishing advance notice requirements for nominations for election to the board of directors or for proposing matters that can be actedupon by stockholders at stockholder meetings. In addition, Section 203 of the Delaware General Corporation Law may discourage, delay or prevent a change of control of our company.Generally, Section 203 prohibits stockholders who, alone or together with their affiliates and associates, own more than 15% of the subject companyfrom engaging in certain business combinations for a period of three years following the date that the stockholder became an interested stockholder ofsuch subject company without approval of the board or 662/3% of the independent stockholders. The existence of these provisions could adverselyaffect the voting power of holders of common stock and limit the price that investors might be willing to pay in the future for shares of our commonstock.68Table of Contents Furthermore, if a "fundamental change" (as defined in the indenture for the Notes) occurs, holders of the Notes will have the right, at their option,to require us to repurchase all or a portion of their Notes. A "fundamental change" generally occurs when there is a change in control of the Company(acquisition of 50% or more of our voting stock, liquidation or sale of the Company not for stock) or trading of our stock is terminated. In the event of a"make-whole fundamental change" (as defined in the indenture for the Notes), we may also be required to increase the conversion rate applicable toNotes surrendered for conversion in connection with such make-whole fundamental change. A "make-whole fundamental change" is generally a sale ofthe company not for stock in another publicly traded company. In addition, the indenture for the Notes prohibits us from engaging in certain mergers oracquisitions unless, among other things, the surviving entity assumes our obligations under the Notes.Our directors, executive officers and major stockholders own approximately 32.7% of our outstanding common stock as of June 30, 2011, whichcould limit stockholders' ability to influence the outcome of key transactions, including changes of control. As of June 30, 2011, our directors, executive officers, and current holders of 5% or more of our outstanding common stock, held, in the aggregate,approximately 32.7% of our outstanding common stock. This concentration of ownership may delay, deter or prevent a change of control of ourcompany and will make some transactions more difficult or impossible without the support of these stockholders.We have not paid dividends in the past and do not expect to pay dividends in the future. We have never declared or paid cash dividends on our capital stock. We currently intend to retain all future earnings for the operation andexpansion of our business and, therefore, do not anticipate declaring or paying cash dividends in the foreseeable future. The payment of dividends willbe at the discretion of our board of directors and will depend on our results of operations, capital requirements, financial condition, prospects,contractual arrangements, and other factors our board of directors may deem relevant. If we do not pay dividends, a return on a stockholders' investmentwill only occur if our stock price appreciates.Item 1B. UNRESOLVED STAFF COMMENTS None.Item 2. PROPERTIES Facilities We currently lease approximately 164,000 square feet of product development, manufacturing and administrative space in three buildings inSunnyvale, California, as follows:•a manufacturing building, which is approximately 50,000 square feet, which is leased to us until December 2018; and •two headquarters buildings, which are approximately 74,000 square feet and 40,000 square feet, respectively, which are leased to usuntil May 31, 2015. We have the right to renew the lease term of our headquarters office buildings for two five-year terms upon priorwritten notice and the fulfillment of certain conditions. We also lease approximately 25,000 square feet of development and manufacturing space in Mountain View, California, under a lease expiring inSeptember 2012. We sublease approximately 1,350 square feet of this space until September 2012.69Table of Contents Our wholly owned subsidiary, TomoTherapy leases approximately 171,000 square feet of product development, manufacturing and administrativespace in three buildings in Madison, Wisconsin, as follows:•an office building, which is approximately 61,000 square feet, which is leased to TomoTherapy until May 2014; •a manufacturing facility, which is approximately 56,000 square feet, which is leased to TomoTherapy until May 2018; and •a portion of an office building totaling approximately 54,000 square feet, which is leased to TomoTherapy until July 2014. In addition, our wholly-owned subsidiary, Chengdu Twin Peak Accelerator Technology Inc., leases approximately 850 square meters of space in amanufacturing facility in Chengdu, China until December 2013. We, directly or through our subsidiaries, also maintain offices in: Pittsburgh, Pennsylvania; Miami, Florida; France; China; Japan; Spain; India;Russia; Germany; Turkey; Belgium, the United Kingdom; and the United Arab Emirates. We believe our current facilities are adequate to meet our current needs, but additional space, including additional radiation-shielded areas in whichsystems can be assembled and tested, may be required in the future to accommodate anticipated increases in manufacturing needs.Item 3. LEGAL PROCEEDINGS Accuray Securities Litigation On July 22, 2009, a securities class action lawsuit was filed in the U.S. District Court for the Northern District of California against us and certainof our current and former directors and officers. On August 7, 2009 and August 9, 2009, two securities class action complaints, both similar to the onefiled on July 22, 2009, were filed against the same defendants in the same court. These three actions were consolidated. The consolidated complaintgenerally alleges that we and the individual defendants made false or misleading public statements regarding our operations and seek unspecifiedmonetary damages and other relief. On August 31, 2010, the Court granted defendants' motion to dismiss the consolidated complaint and grantedplaintiffs leave to file an amended complaint. On September 27, 2010, plaintiffs filed an amended complaint. The amended complaint names us andcertain of our current and former officers and directors as defendants and generally alleges that the defendants made false or misleading publicstatements regarding our operations. The amended complaint seeks unspecified monetary damages and other relief. Defendants filed a motion to dismissthe amended complaint. On April 28, 2011, the parties filed a stipulation of settlement with the court, providing for the settlement of the litigation for apayment of $13.5 million which was covered by insurance. The court preliminarily approved the settlement on June 10, 2011. A hearing on the terms ofthe settlement was held on September 1, 2011. A final judgment is expected in November of this year.Stockholder Derivative Actions On August 5, 2009, a shareholder derivative lawsuit was filed in Santa Clara County Superior Court against certain of our current and formerofficers and directors. We are named as a nominal defendant. The complaint generally alleges that the defendants breached their fiduciary duties bymisrepresenting and/or failing to disclose material information regarding our business and financial performance, and seeks unspecified monetarydamages and other relief. On February 25, 2010, the plaintiff dismissed the action without prejudice.70Table of Contents On November 24, 2009, a shareholder derivative lawsuit was filed in the U.S. District Court for the Northern District of California against certainof our current and former officers and directors. We are named as a nominal defendant. Three other shareholder derivative lawsuits were filed in thesame court on November 30, 2009, December 1, 2009 and March 16, 2010. These actions have been consolidated. The amended consolidatedcomplaint generally alleges that the defendants breached their fiduciary duties by misrepresenting and/or failing to disclose material informationregarding our business and financial performance, and that certain defendants also violated federal and California securities laws. The amendedconsolidated complaint seeks unspecified monetary damages and other relief. On August 31, 2010, the Court granted defendants' motion to dismiss,with leave to amend. On September 27, 2010, plaintiffs filed a notice of their intent not to file an amended complaint. On October 6, 2010, judgmentwas entered and the action dismissed. Plaintiffs filed a notice of appeal to the U.S. Court of Appeals for the Ninth Circuit on November 8, 2010. OnMarch 15, 2011, the parties filed a joint motion to voluntarily dismiss the appeal without prejudice and to remand the action to the district court forconsideration of the settlement. On March 16, 2011, the parties filed their Stipulation of Settlement and plaintiffs filed an unopposed motion forapproval of the settlement. A hearing on final approval of the settlement was held on May 5, 2011. The court approved the settlement for a payment of$0.8 million which was fully covered by insurance, and entered final judgment on May 6, 2011. On February 14, 2011, a purported shareholder filed a complaint in Santa Clara County Superior Court naming as defendants certain of our currentand former officers and directors. We are named as a nominal defendant. The complaint generally copied the allegations of the federal derivative actionand also alleged that a litigation demand concerning such allegations was wrongfully denied. On March 24, 2011, the plaintiff filed an amendedcomplaint. On April 28, 2011, we and a number of individual defendants filed demurrers to the amended complaint. On June 23, 2011, the court entereda stipulation and proposed order dismissing the case with prejudice.Litigation relating to the TomoTherapy Acquisition On March 11, 2011, a purported class action complaint was filed in the Circuit Court for the State of Wisconsin, Dane County, on behalf of aputative class of TomoTherapy shareholders and naming as defendants TomoTherapy and TomoTherapy's board of directors (prior to the acquisition ofTomoTherapy by Accuray). Thereafter, four additional complaints were filed in the same court on behalf of the same class and against the samedefendants, and two such complaints also named Accuray and Jaguar Acquisition, Inc., a wholly-owned subsidiary of Accuray ("Merger Sub"). OnApril 4, 2011, all five actions were consolidated. The complaints generally alleged that, in connection with Accuray's then proposed merger transactionwith TomoTherapy, TomoTherapy's board breached their fiduciary duties by, among other things, failing to maximize the value of TomoTherapy to itsshareholders and purportedly agreeing to certain terms in the merger agreement, which are allegedly preclusive and onerous. The complaints furtheralleged that Accuray and Merger Sub aided and abetted TomoTherapy's board of directors in their alleged breaches of fiduciary duties. The plaintiffssought, among other things, an injunction barring consummation of the merger, rescission or recessionary damages, costs and attorneys' fees. Accurayand Merger Sub were dismissed from the litigation without prejudice on April 19, 2011. The consolidated complaint against TomoTherapy and theformer directors of TomoTherapy was dismissed with prejudice and without costs to either party on July 5, 2011.Best Medical Trade Secret Litigation On September 3, 2009, Best Medical International, Inc. ("Best Medical") filed a lawsuit against us in the U.S. District Court for the WesternDistrict of Pennsylvania, claiming we induced certain individuals to leave the employment of Best Medical and join us in order to gain access to BestMedical's confidential information and trade secrets. We filed a motion for summary judgment on71Table of ContentsMay 20, 2011, and Best Medical filed its response on June 21, 2011, and we filed a response to their response on July 8, 2011. We are awaiting aruling by the court. Best Medical is seeking monetary damages and other relief. At this time, we do not have enough information to estimate what, ifany, financial impact this claim will have.Best Medical Patent Litigation On August 6, 2010, Best Medical filed an additional lawsuit against us in the U.S. District Court for the Western District of Pennsylvania,claiming we have infringed U.S. Patent No. 5,596,619, a patent that Best Medical alleges protects a method and apparatus for conformal radiationtherapy. On December 2, 2010, the Court granted our motion to dismiss, with leave to amend. On December 16, 2010, Best Medical filed an amendedcomplaint, claiming that we also infringe U.S. Patent Nos. 6,038,283 and 7,266,175, both of which Best Medical alleges cover methods and apparatusfor conformal radiation therapy. On March 9, 2011, the Court dismissed with prejudice all counts against us, except for two counts of alleged willfulinfringement of two of the patents. The Court issued a Scheduling Order on May 12, 2011 appointing a special master for claim construction, andsetting a claim construction hearing on January 10, 2012. Best Medical moved to voluntarily dismiss one of the two remaining patents on June 28,2011, which the court granted on June 30, 2011, leaving only one patent (U.S. Patent No. 6,038,283) at issue in the case. On September 1, 2011, theCourt modified its Scheduling Order, setting a claim construction hearing on January 24-25, 2012. Best Medical is seeking declaratory and injunctiverelief, as well as unspecified compensatory and treble damages and other relief. At this time, we do not have enough information to estimate what, ifany, financial impact this claim will have.TomoTherapy Securities Litigation On May 30, 2008 and June 10, 2008, two separate complaints were filed by certain shareholders of TomoTherapy in the U.S. District Court forthe Western District of Wisconsin against TomoTherapy, certain of its officers and all of its independent directors during the period in question. Thecomplaints were consolidated on October 23, 2008. The consolidated complaint generally alleges that the defendants violated the Securities Act of 1933with respect to statements made in connection with the initial and secondary public offerings of the Company's common stock and the SecuritiesExchange Act of 1934 by misrepresenting TomoTherapy's projected financial outlook during the period May 9, 2007 through April 17, 2008. Thecomplaint seeks compensatory damages in an unspecified amount. TomoTherapy moved to dismiss the consolidated complaint on December 8, 2008.On July 9, 2009, the Court dismissed all but one claim for failure to state a claim upon which relief could be granted. On August 3, 2009, the plaintiffsfiled their Second Amended Consolidated Complaint. TomoTherapy filed a motion to dismiss on September 3, 2009, and on December 15, 2009, theCourt granted this second motion to dismiss in part and denied it in part. On July 28, 2010, TomoTherapy entered into a settlement agreement, whichwas approved by the court on March 18, 2011 after notification to purported class members. Under the settlement, the claims against TomoTherapy andits officers and directors were dismissed with prejudice and released in exchange for a cash payment of $5.0 million, which has been placed in escrow,and was funded by TomoTherapy's insurance carrier. A portion of this amount was the fee awarded to class counsel by the Court.TomoTherapy Stockholder Derivative Actions On May 28, 2010 and July 9, 2010, two separate derivative lawsuits were filed in the Circuit Court of Dane County in Madison, Wisconsin bycertain shareholders of TomoTherapy against TomoTherapy and certain officers and all of the persons who have served as directors of TomoTherapysince May 9, 2007. The complaints alleged that all of the individual defendants breached their fiduciary duties and engaged in abuse of control, grossmismanagement and waste of corporate assets, and that certain of72Table of Contentsthem were unjustly enriched. The complaints were consolidated on October 11, 2010. The allegations were substantially similar to those claims made inthe TomoTherapy Securities Litigation describe above. The complaints sought damages, equitable relief, restitution and disgorgement of profits, costsand disbursements of the action, and other relief the court deemed proper. In March 2010, TomoTherapy received two shareholder demand letters fromattorneys representing other shareholders containing allegations substantially similar to those made in the foregoing complaints. On February 9, 2011, TomoTherapy entered into an agreement to settle all of the foregoing complaints and demand letters. Under the settlement,the claims against TomoTherapy and its officers and directors were dismissed with prejudice and released in exchange for implementation of a numberof governance changes and the payment of $275,000 for attorneys fees, $250,000 of which would be funded by TomoTherapy's insurance carrier. OnMarch 4, 2011, the court preliminarily approved the terms of the settlement, subject to notice to shareholders. Final approval was granted by the court inApril 2011. As of June 30, 2011, we estimated that we would not incur any material costs in connection with these claims or the defense thereof, giventhat TomoTherapy has already paid the applicable $0.5 million insurance deductible in connection with the TomoTherapy Securities Litigation describedabove.TomoTherapy Former Distributor in Japan On July 17, 2009, Hi-Art Co., Ltd. (Hi-Art), TomoTherapy's former distributor in Japan, filed a complaint against TomoTherapy in the TokyoDistrict Court seeking compensation it claims is owed by TomoTherapy. The Company and Hi-Art entered into a settlement agreement pursuant towhich the Company has agreed to pay 190,000,000 yen (or approximately $2.3 million) and Hi-Art has dropped all claims against TomoTherapy andthe Company. This amount is included in accrued liabilities as of June 30, 2011. On July 26, 2011, the Court approved the settlement and issued adecree dismissing the case.Rotary Systems On April 28, 2011, a former supplier to TomoTherapy, Rotary Systems Incorporated, filed suit in Minnesota state court, Tenth Judicial District,Anoka County, against TomoTherapy alleging misappropriation of trade secrets. Rotary Systems alleges TomoTherapy possessed Rotary Systems'trade secrets pertaining to a component previously purchased from Rotary Systems, which component TomoTherapy now purchases from a differentsupplier. The suit alleges TomoTherapy improperly supplied the alleged trade secrets to its present supplier, Dynamic Sealing Technologies Inc. (also anamed defendant in the suit). TomoTherapy moved to dismiss the case in June 2011. Rotary Systems has made an unspecified claim for damages ofgreater than $50,000. At this time, we do not have enough information to estimate what, if any, financial impact this claim will have. From time to time, we are involved in legal proceedings arising in the ordinary course of our business. Currently, except for the settlement with Hi-Art previously discussed, we do not have a potential liability related to any current legal proceedings and claims that would individually or in theaggregate materially adversely affect our financial condition or operating results. Litigation is inherently unpredictable and is subject to significantuncertainties, some of which are beyond our control. Should any of these estimates and assumptions change or prove to have been incorrect, we couldincur significant charges related to legal matters which could have a material impact on our results of operations, financial position and cash flows.Item 4. (Removed and Reserved) 73Table of ContentsPART II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASESOF EQUITY SECURITIES Stock Information Our common stock is traded on the Nasdaq Global Select Market under the symbol "ARAY." The high and low sale prices for each quarterlyperiod during our fiscal years ended June 30, 2011 and 2010 are as follows: We have never paid cash dividends on our common stock. Our Board of Directors intends to use any future earnings to support operations andreinvest in the growth and development of our business. There are no current plans to pay out cash dividends to common stockholders in theforeseeable future. As of August 31, 2011, there were 274 registered stockholders of record of our common stock. Because many of our shares of common stock areheld by brokers or other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by the recordholders.Stock Performance Graph The graph set forth below compares the cumulative total stockholder return on our common stock between February 8, 2007 (the date of our initialpublic offering) and June 30, 2011, with the cumulative total return of (i) the S&P Healthcare Index and (ii) the Nasdaq Composite Index, over the sameperiod. This graph assumes the investment of $100.00 on February 8, 2007 in our common stock, the S&P Healthcare Index and the NasdaqComposite Index, and assumes the reinvestment of dividends, if any. The graph assumes the initial value of our common stock on February 8, 2007was the closing sales price of $28.47 per share. The comparisons shown in the graph below are based upon historical data. We caution that the stock price performance shown in the graph belowis not necessarily indicative of, nor is it intended to forecast, the potential future performance of our common stock. Information used in the graph wasobtained from Research Data Group, a source believed to be reliable, but we are not responsible for any errors or omissions in such information.74 High Low Year ended June 30, 2011 First Quarter $7.00 $5.87 Second Quarter $7.00 $5.85 Third Quarter $11.16 $6.63 Fourth Quarter $9.64 $6.67 Year ended June 30, 2010 First Quarter $7.58 $5.75 Second Quarter $6.86 $4.93 Third Quarter $7.75 $5.50 Fourth Quarter $7.18 $5.77 Table of ContentsCOMPARISON OF 53 MONTH CUMULATIVE TOTAL RETURNAmong Accuray Incorporated, the NASDAQ Composite Indexand the S&P Health Care Index The information set forth under the heading "Equity Compensation Plan Information" in Item 12 of this Annual Report on Form 10-K isincorporated herein by reference.Item 6. SELECTED FINANCIAL DATA The following selected consolidated financial data should be read in conjunction with, and are qualified by reference to, our consolidated financialstatements and related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing elsewhere inthis Form 10-K. The consolidated statements of operations for the years ended June 30, 2011, 2010 and 2009, and the consolidated balance sheet data atJune 30, 2011 and 2010 are derived from, and are qualified by reference to, the consolidated financial statements that have been audited by ourindependent registered public accounting firm, which are included elsewhere in this Form 10-K. The consolidated statements of operations data for theyears ended June 30, 2008 and 2007 and the consolidated balance sheet data at June 30, 2009, 2008 and 2007 is derived from our audited consolidatedfinancial statements not included in this Form 10-K.75Table of Contents On June 10, 2011, we completed the acquisition of TomoTherapy by acquiring all of the common stock of TomoTherapy in exchange for cash andshares of Company common stock. TomoTherapy is now a wholly owned subsidiary of the Company. Years Ended June 30, 2011 2010 2009 2008 2007 (in thousands, except per share data) Consolidated Statements of Operations Data: Net revenue $222,284 $221,625 $233,598 $210,381 $140,452 Cost of revenue(1) 115,042 117,607 118,308 103,429 60,413 Gross profit 107,242 104,018 115,290 106,952 80,039 Operating expenses: Selling and marketing(1) 37,181 34,187 45,493 42,726 37,889 Research and development(1) 41,687 31,523 35,992 32,880 26,775 General and administrative(1) 56,657 35,472 36,223 32,280 23,915 Total operating expenses 135,525 101,182 117,708 107,886 88,579 Income (loss) from operations (28,283) 2,836 (2,418) (934) (8,540)Other income, net 2,288 1 3,082 7,184 3,530 Income (loss) before provision for income taxes andcumulative effect of change in accounting principle (25,995) 2,837 664 6,250 (5,010)Provision for (benefit from) income taxes 1,116 (4) 55 867 1,444 Income (loss) before cumulative effect of change inaccounting principle (27,111) 2,841 609 5,383 (6,454)Cumulative effect of change in accounting principle, net oftax of $0 — — — — 838 Net income (loss) (27,111) 2,841 609 5,383 (5,616)Noncontrolling interest (429) — — — — Net income (loss) attributable to stockholders $(26,682)$2,841 $609 $5,383 $(5,616) Net income (loss) per common share: Basic Income (loss) before cumulative effect of change inaccounting principle $(0.44)$0.05 $0.01 $0.10 $(0.21) Cumulative effect of change in accounting principle — — — — 0.03 Basic net income (loss) per share $(0.44)$0.05 $0.01 $0.10 $(0.18) Diluted Income (loss) before cumulative effect of change inaccounting principle $(0.44)$0.05 $0.01 $0.09 $(0.21) Cumulative effect of change in accounting principle — — — — 0.03 Diluted net income (loss) per share $(0.44)$0.05 $0.01 $0.09 $(0.18) Weighted average common shares outstanding used incomputing net income (loss) per share: Basic 60,085 57,560 55,413 54,531 30,764 Diluted 60,085 60,191 58,729 60,434 30,764 (1)Includes share-based compensation expense as follows: Years Ended June 30, 2011 2010 2009 2008 2007 (in thousands) Cost of revenue $1,312 $1,721 $2,285 $1,858 $1,205 Selling and marketing $695 $1,433 $3,441 $4,197 $3,958 Research and development $2,922 $2,850 $3,190 $3,059 $2,448 76General and administrative $8,436 $4,642 $6,545 $7,785 $5,016 Table of Contents 77 Years Ended June 30, 2011 2010 2009 2008 2007 Selected Operating Data: Number of CyberKnife systems installed peryear: United States 14 18 25 19 22 International 20 13 11 12 11 Total 34 31 36 31 33 As of June 30, 2011 2010 2009 2008 2007 (in thousands) Consolidated BalanceSheet Data: Cash and cash equivalents $95,906 $45,434 $36,835 $36,936 $204,830 Short-term investments $— $99,881 $64,634 $85,536 $— Long-term investments $— $— $57,252 $37,014 $— Deferred cost of revenue $8,098 $11,102 $21,917 $43,391 $61,231 Total assets $455,784 $263,184 $274,386 $295,004 $332,109 Deferred revenue $74,244 $47,393 $75,882 $114,175 $154,257 Working capital $82,678 $152,048 $80,083 $87,744 $148,522 Stockholders' equity $229,775 $170,076 $153,902 $130,763 $125,443 Table of ContentsItem 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion of our consolidated financial condition and results of operations in conjunction with the financialstatements and the notes thereto included elsewhere in this report. The following discussion contains forward-looking statements that reflect our plans,estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause orcontribute to these differences include those discussed below and elsewhere in this report on Form 10-K, particularly in "Risk Factors." See "SpecialNote Regarding Forward-Looking Statements."OverviewProducts and Markets We believe we are the premier radiation oncology company based on our history of rapid innovation and our leading edge technologies designedspecifically to deliver radiosurgery, stereotactic body radiation therapy, intensity modulated radiation therapy, image guided radiation therapy, andadaptive radiation therapy that is tailored to the specific needs of each patient. Our suite of products includes the CyberKnife® System and theTomoTherapy® System. The systems are highly complementary offerings, serving distinct patient populations treated by the same medical specialty. The CyberKnife System is a robotic system designed to deliver radiosurgery treatments to cancer tumors anywhere in the body. It is the onlydedicated, full body radiosurgery system on the market. Radiosurgery is an alternative to traditional surgery for tumors and is performed on anoutpatient basis in one to five treatment sessions. It allows for the treatment of patients who otherwise would not be treated with radiation, who may notbe good candidates for surgery, or who desire non-surgical treatments. The use of radiosurgery with the CyberKnife System to treat tumors throughoutthe body has grown significantly in recent years, but currently represents only a small portion of the patients who develop tumors treatable with theCyberKnife System. We believe that the long term success of the CyberKnife System is dependent on a number of factors including the following:•Change in medical practice to utilize radiosurgery more regularly as an alternative to surgery or other treatments; •Greater awareness among doctors and patients of the benefits of radiosurgery with the CyberKnife System; •Continued evolution in clinical studies demonstrating the safety and efficacy of the use of the CyberKnife System to treat tumors invarious parts of the body; •Continued advances in technology which improve the quality of treatments and ease of use of the CyberKnife System; •Improved access to radiosurgery with the CyberKnife System in various countries through regulatory approvals and / or medicalinsurance reimbursement rates; and •Expansion of CyberKnife System sales in countries throughout the world. The TomoTherapy Systems are advanced, fully integrated and versatile radiation therapy systems for the treatment of a wide range of cancer types.We began selling TomoTherapy Systems after our acquisition of TomoTherapy Incorporated on June 10, 2011. Radiation therapy is used in a variety ofways, often to treat tissue surrounding a tumor area after surgical removal of the tumor and also as the primary treatment for tumors. Radiation therapytreatments impact both cancer cells as well as healthy tissue; therefore the total prescribed radiation dose is divided into many fractions and delivered inan average of 25 to 35 treatment sessions over several weeks. Radiation therapy has been widely available78Table of Contentsand used in developed countries for decades, though many developing countries do not currently have a sufficient number of linacs to adequately treattheir domestic cancer patient populations. The number of radiation therapy systems in use and sold each year is currently many times larger than forradiosurgery systems. Large companies, including Varian Medical Systems, Inc., Elekta AB and Siemens AG, generate most sales in this market. Whilethe market for radiation therapy systems is very large and well established, growth in demand for radiation therapy system is generally considered to belower than for radiosurgery systems. We believe the TomoTherapy Systems offer clinicians and patients significant benefits over other radiation therapysystems in the market. We believe our ability to capture more sales in this established market will be influenced by a number of factors including thefollowing:•Greater awareness among doctors and patients of the benefits of radiation therapy using TomoTherapy Systems; •Advances in technology which improve the quality of treatments and ease of use of TomoTherapy Systems; and •Expansion of TomoTherapy System sales in countries throughout the world.Sale of Our Products Generating revenue from the sale of our systems is a lengthy process. Selling our systems, from first contact with a potential customer to acomplete order, generally spans six months to two years and involves personnel with multiple skills. The time from receipt of a complete order torevenue recognition is governed generally by the time required by the customer to build, renovate or prepare the treatment room for installation of thesystem. This time varies quite a bit, generally from 6 to 24 months. In the United States, we sell to customers, including hospitals and stand-alone treatment facilities, directly through our sales organization. Outsidethe United States, we sell to customers in over 80 countries directly and through distributors. We have sales and service offices in France, Belgium,Germany, England, Spain, Turkey, Russia, India, Japan, Hong Kong, China and Singapore. As of June 30, 2011, we had 151 employees in our salesand marketing organization. The following table shows the number of systems installed by geographic region as of June 30, 2011: International sales of our products account for a significant and growing portion of our total revenue. Revenue derived from sales outside of theUnited States was $99.6 million, $74.2 million and $62.0 million for fiscal 2011, 2010 and 2009, respectively, and international sales as a percentage ofour total revenue was 45% in fiscal 2011, 34% in fiscal 2010, and 27% in fiscal 2009. We believe the increase in international sales for the year endedJune 30, 2011 is due to a number of factors, including the following: increased focus on international markets through regionalization, different impactof the economic downturn by country, greater significance of government affiliated hospital customers, different competitive dynamics, and growth inselect country markets.79 CyberKnifeSystems TomoTherapySystems Total Americas 146 207 353 Asia 52 61 113 Europe 42 74 116 Total 240 342 582 Table of Contents2011 Business Highlights On June 10, 2011, we completed the acquisition of TomoTherapy, a creator of advanced radiation therapy solutions for cancer care, by acquiringall TomoTherapy common stock in exchange for cash and shares of Accuray common stock. As a result of the acquisition, TomoTherapy became awholly owned subsidiary of Accuray. The total consideration that we paid to TomoTherapy stockholders was approximately $248.0 million, or $4.80per share of TomoTherapy common stock, in a combination of cash ($3.15 per share) and stock (0.1648 shares of Accuray common stock per share ofTomoTherapy common stock). In December 2010, the U.S. Food and Drug Administration (FDA) granted us 510(k) clearance to market Lung Optimized Treatment, a newcomponent of the CyberKnife® VSI™ System. The 510(k) clearance enables us to provide physicians with greater flexibility in delivering radiosurgerytreatments to patients with lung cancer, the most common and deadly cancer worldwide. Lung Optimized Treatment is a new tool developed to meet theclinical demand for more flexibility in treating lung cancer patients with radiosurgery and the desire to move away from reliance on fiducial markers. In November 2010, the TomoHD™ System was introduced. This system includes both our TomoHelicalTM and TomoDirectTM treatmentmodalities and enables cancer centers to treat a significantly expanded patient population.BacklogCyberKnife Systems For fiscal 2010 and 2011, Accuray backlog for the CyberKnife product consists of the sum of deferred revenue, future un-invoiced payments thatour customers are contractually committed to make, signed, non-contingent CyberKnife System sale agreements that meet the detailed criteria set forthbelow, service plans and minimum payment requirements associated with our shared ownership program. In order for a CyberKnife System saleagreement to be counted as backlog, it must meet the following criteria:•The contract is signed and properly executed by both the customer and us; •The contract is non-contingent—it either has cleared all its contingencies or contains no contingencies when signed; •We have received a deposit or a letter of credit, or the sale is a direct channel sale to a government entity; •The specific end customer site has been identified by the customer in the written contract or written amendment; and •Less than 2.5 years have passed since the contract met all the criteria above. Included in customers' agreements to purchase a CyberKnife System is an option to select the type and term of service coverage that they desire.Backlog includes the value of this service coverage selected by customers in their original agreement to purchase a CyberKnife System. Beforeinstallation of the CyberKnife System is complete and service commences, the customer must complete and sign a separate service agreement for servicecoverage (i.e., Diamond or Emerald service). If at the time of signing the service agreement a customer selects a different type of service than the optionselected in the CyberKnife System purchase agreement, our backlog is adjusted to reflect the service agreement the customer signed. At June 30, 2011 and 2010, our backlog for the CyberKnife product was approximately $453.9 million and $374.1 million, respectively. Of thisbacklog, $190.2 million and $131.9 million represented CyberKnife System sales at June 30, 2011 and 2010, respectively, and $263.7 million and80Table of Contents$242.2 million represented revenue from service plans and other recurring revenues at June 30, 2011 and 2010, respectively. We anticipate that thisbacklog will be recognized over the next five years as installations occur, upgrades are delivered and services are provided.TomoTherapy Systems Historically TomoTherapy reported only sales of TomoTherapy Systems in backlog. Orders for service plans were not included in reportedbacklog. Orders for the sale of TomoTherapy Systems were included in backlog based on an internal evaluation of the order rather than based onspecific criteria as outlined above for CyberKnife orders. From June 10, 2011 through June 30, 2011, we continued use of the method used byTomoTherapy in evaluating whether orders for TomoTherapy Systems were included in backlog. Evaluated in accordance with the methods utilizedhistorically by TomoTherapy, backlog for TomoTherapy Systems totaled approximately $135.1 million at June 30, 2011. Although our backlog includes only contractual agreements from our customers to purchase CyberKnife Systems or TomoTherapy Systems, wecannot make assurances that we will convert backlog into recognized revenue due to factors outside our control including without limitation, changes incustomers' needs, changes in reimbursement, changes to regulatory requirements, or other cancellation of orders.Backlog Reporting Beginning Fiscal 2012 Beginning in fiscal 2012 (the fiscal year beginning July 1, 2011), we will report backlog in a manner that is common for all of our products.•Products: Orders for systems, upgrades, and our shared ownership program will be reported in backlog, excluding amountsattributable to warranty service, training and installation. •Service: Orders for service, warranty, installation, training and other recurring revenues will not be reported in backlog. Previously,orders for service were reported in backlog for CyberKnife Systems but not for TomoTherapy Systems. For orders that cover both products and services, only the portion of the order that will be recognized as product revenue will be reported asbacklog. The portion of the order that will be recognized as service revenue (for example, warranty service, installation and training) will not be includedin reported backlog. Additionally, orders for TomoTherapy that met the historical TomoTherapy backlog criteria have been grandfathered into, and areincluded in, our backlog, with the exception of orders that would have "aged out" as of June 30, 2011. TomoTherapy previously did not have an "ageout" criteria, so we have adjusted the TomoTherapy backlog to age out orders where 2.5 years have passed from the time the order enteredTomoTherapy's backlog. As of June 30, 2011, product only backlog was $288.5 million in total, comprised of $181.2 million for CyberKnife Systemsand $107.3 million for TomoTherapy Systems. These amounts exclude any portion of orders that will be reflected as service revenue and therefore aredifferent than the amounts reported above. Going forward in fiscal 2012, in order for the product portion of a sales agreement to be counted as backlog, it must meet the following criteria:•The contract is signed and properly executed by both the customer and us. A customer purchase order that is signed and incorporates theterms of our contract quote will be considered equivalent to a signed and executed contract; •The contract is non-contingent—it either has cleared all its contingencies or contains no contingencies when signed; •We have received a deposit, a letter of credit, the sale is a direct channel sale to a government entity, or the product has shipped to acustomer with credit sufficient to cover the deposit;81Table of Contents•The specific end customer site has been identified by the customer in the written contract or written amendment; and •Less than 2.5 years have passed since the contract met all the criteria above.Material Weakness in Internal Control In connection with our evaluation of internal control over financial reporting, we identified a material weakness relating to our accounting forsignificant, non-routine transactions which prevented the timely preparation of our consolidated financial statements. Our efforts to remediate thismaterial weakness in our internal control over financial reporting consist of the following corrective action: hiring additional highly skilled accountants.However, even after this corrective action is implemented, the effectiveness of our controls and procedures may be limited by a variety of risks. Although we have taken measures to remediate previously reported material weaknesses as well as other significant deficiencies and controldeficiencies, we cannot assure you that we have identified all, or that we will not in the future have additional material weaknesses, significantdeficiencies and control deficiencies.Results of OperationsYears ended June 30, 2011, 2010 and 2009Net revenue Total net revenue for fiscal 2011 increased $0.7 million from fiscal 2010 to $222.3 million. This includes $11.1 million of net revenue from thesale of TomoTherapy products and services since the June 10, 2011 close of the acquisition: $4.8 million of products revenue, $6.1 million of servicesrevenue, and $0.2 million of other revenue. Revenue recognized for CyberKnife Systems sold under our Platinum plan declined to $1.9 million duringfiscal 2011 from $12.6 million in fiscal 2010. Prior to fiscal 2007, we sold CyberKnife Systems with our Platinum service plan, which providedspecified upgrades over the term of service coverage purchased by the customer. In accordance with applicable software revenue recognition rules, wedeferred recognition of all revenue (product and service) until the last specified upgrade was delivered. After this point, the previously deferred revenuewas recognized as revenue over the then remaining term of service coverage. All specified upgrades on systems sold with Platinum service plans weredelivered by the end of fiscal 2010 and all product revenue related to systems sold with Platinum service plans was recognized by the end of fiscal2011. During fiscal 2011, 34 CyberKnife Systems were installed, of which 33 were sold and one was attributable to our shared ownership program,compared to 31 systems installed, including 30 sold and one attributable to our shared ownership program during fiscal 2010. Excluding $1.4 million ofrevenue previously deferred under Platinum service agreements, service revenue totaled $79.1 million for fiscal 2011, an increase of $11.4 million fromfiscal 2010 service revenue excluding Platinum, as a result of continued growth in our installed base covered by service plans and the addition of servicerevenue for TomoTherapy products. Other revenue increased due to facility construction work that we managed for customers in fiscal 2011.82 Years Ended June 30, (Dollars in thousands) 2011 2010 2009 FY11 vs. FY10 FY10 vs. FY09 Products $138,595 $143,187 $162,908 $(4,592) (3)%$(19,721) (12)% Services 80,490 77,504 66,344 $2,986 4%$11,160 17% Other 3,199 934 4,346 $2,265 243%$(3,412) (79)% Net revenue $222,284 $221,625 $233,598 $659 0%$(11,973) (5)% Table of Contents Total net revenue for fiscal 2010 decreased $12.0 million from fiscal 2009. During fiscal 2010, 31 CyberKnife Systems were installed, of which30 were sold and one was attributable to our shared ownership program, compared to 36 systems installed, including 35 sold and one attributable to ourshared ownership program during fiscal 2009. Not including our revenue recognized for systems sold under our Platinum plan, we recognized $128.7 million of products revenue in fiscal 2010,associated with 38 CyberKnife Systems sold. By comparison, during fiscal 2009, we recognized products revenue of $123.7 million associated with41 CyberKnife Systems, which included 39 units sold and two units purchased out of our shared ownership program. The increase in fiscal 2010 is dueprimarily to the remaining deferred revenue for units sold in prior periods recognized in fiscal 2010 in accordance with our revenue recognition policyand an increase in upgrades and accessories sold. Excluding revenue recognized for systems sold under our Platinum plan, we recognized non-Platinumservice revenue of $61.2 million for fiscal 2010, which increased approximately $19.3 million from fiscal 2009, due to the continued growth in ourinstalled base under service plans. We recognized $28.9 million of revenue in fiscal 2010 from systems sold under our Platinum plan, $12.6 million for products revenue and$16.3 million for services revenue. We recognized $60.1 million of revenue in fiscal 2009 from systems sold under our Platinum plan, $35.6 million forproducts revenue and $24.5 million for services revenue. By the end of June 2010, we had satisfied all upgrade delivery obligations on the 30 units soldunder our Platinum plan. Once all upgrade delivery obligations have been satisfied, revenue is recognized over the remaining term of the contract serviceterm. Revenue from upgrade services in Japan, classified as "Other revenue" in our consolidated statements of operations for fiscal 2010, decreasedapproximately $3.4 million from fiscal 2009 due to a decrease in upgrade services provided to our installed systems in Japan. Shared ownership program revenue for fiscal 2010 decreased approximately $1.8 million from fiscal 2009, primarily due to the sale of oneCyberKnife System at the end of fiscal 2009 that had been in our shared ownership program.Gross profit Our gross profit margin was higher by 1.3 percentage points in fiscal 2011 than in fiscal 2010 due to the improved margin on products revenue,offset partially by a reduction in the gross profit margin on services revenue. The improvement in our overall gross profit margin was partially offset bynegative gross profit margin associated with the TomoTherapy revenues included in our results since the acquisition closed on June 10, 2011. The gross profit margin on products revenue rose by 6.1 percentage points due mainly to the commencement of shipments of our newestCyberKnife model, the CyberKnife VSI, which sells for a higher average price than the predecessor model, the G4. The higher average price, combinedwith improved manufacturing efficiency and cost reductions, resulted in a higher gross profit margin on the CyberKnife VSI model, which accountedfor the majority of sales in fiscal 2011.83 Years Ended June 30, 2011 2010 2009 (Dollars inthousands) (% of netrevenue) (Dollars inthousands) (% of netrevenue) (Dollars inthousands) (% of netrevenue) Gross profit $107,242 48.2%$104,018 46.9%$115,290 49.4% Products $83,071 59.9%$76,971 53.8%$93,229 57.2% Services $24,272 30.2%$26,772 34.5%$21,753 32.8% Other $(101) (3.2)%$275 29.4%$308 7.1%Table of Contents The gross profit margin on services revenue declined by 4.3 percentage points due to the inclusion in our fiscal 2011 results of TomoTherapyservices revenue for the period from June 11 through June 30, 2011. The TomoTherapy services revenue incurred a 13.7% negative gross margin inour financial statements during this period. Excluding the results of TomoTherapy during this 20 day period, the gross profit margin on service in fiscal2011 was approximately unchanged from fiscal 2010. In accordance with purchase accounting standards, a number of adjustments were recorded to the value of assets and liabilities of TomoTherapy asof the closing of the acquisition on June 10, 2011. These included the write-up of inventory based on selling price rather than cost of manufacturing, thewrite-down of deferred product revenue, the write-up of deferred service revenue, and the recording of intangible assets related to developed technologyand to backlog existing at the time of the acquisition. On the acquisition date, deferred service and product revenues were valued at cost plus areasonable margin. Including the results of these and other purchase accounting adjustments, the results from the sale of TomoTheraphy products andservices for the period June 11 to June 30, 2011 reflect a negative gross margin. Products and other revenue was reduced by $5.6 million whileproducts and other cost of revenues was increased by $0.1 million. Services revenue was increased by $2.8 million and services cost of revenues wasincreased by $2.1 million. We expect that the impact of the purchase accounting adjustments to inventory and deferred revenues will flow through ourstatement of operations from the date of the acquisition through the third quarter of fiscal 2012. The $10.5 million of intangible assets assigned tobacklog will be charged to cost of revenues over a 15-month period from acquisition through August 2012. The $41.6 million of intangible assetsassigned to developed technology will be charged to cost of revenues over a six year period from acquisition through fiscal 2017. The $1.9 million ofintangible assets assigned to distributor license will be charged to cost of revenues over a 2.5 year period from acquisition through December 2013. Gross profit as a percentage of net revenue for fiscal 2010 decreased from fiscal 2009. This decrease is due to a change in the mix of revenuesources, as well as changes in the gross profit margin for these revenue sources. Services revenue, with a gross profit margin lower than for productsrevenue, increased as a percentage of total net revenue due to the continued installation of new systems and a decline in products revenue. In addition,product margins declined due to a number of factors including a trend towards higher functionality configurations which carry higher costs. Theincrease in service revenue margins was attributable to a greater number of systems on a service contract and lower replacement parts consumption overthe prior year. Shared ownership program revenue for fiscal 2010, included in products revenue, decreased primarily due to the sale of units in theshared ownership program and reduction in residual revenue from the units sold in prior years.Selling and marketing expenses Selling and marketing expenses for fiscal 2011 increased $3.0 million from fiscal 2010. The increase was primarily attributable to $1.1 million ofacquisition-related costs, $1.2 million in marketing expenses due to tradeshow, advertising and users meetings, and $0.7 million in consulting expensesmainly attributable to global branding, partially offset by lower compensation and employee related expenses of $1.7 million. Additionally, there were$2.0 million of selling and marketing expenses incurred by our TomoTherapy subsidiary primarily consisting of $0.7 million of employee relatedexpenses, $0.6 million of sales commissions, $0.2 million of tradeshows and advertising and $0.3 million of travel costs. Selling and marketing expenses for fiscal 2010 decreased $11.3 million from fiscal 2009. The decrease was primarily attributable to a decrease of$4.6 million in salaries, benefits and share-based84 Years Ended June 30, (Dollars in thousands) 2011 2010 2009 FY11 vs.FY10 FY10 vs. FY09 Selling andmarketing $37,181 $34,187 $45,493 $2,994 9%$(11,306) (25)% % of net revenue 16.7% 15.4% 19.5% Table of Contentscompensation as we reduced headcount in selling and marketing by approximately 12% from the prior year. We increased efforts to control spending infiscal year 2010 resulting in the reduction of $2.2 million in travel, entertainment and meetings, $1.7 million in advertising and trade show expenses,$0.6 million of other outside services and $0.7 million in allocated facility expenses, as a result of the reduction in sales and marketing headcount. Salescommissions decreased $0.8 million due to lower total revenue and amounts that were expensed for employees terminated during the year endedJune 30, 2009. We expect selling and marketing expenses to increase in fiscal 2012 from fiscal 2011 due to the acquisition of TomoTherapy. Integration of salesand marketing activities for the CyberKnife and TomoTherapy Systems in fiscal 2012 will involve expenses such as severance that will not continueinto fiscal 2013.Research and development expenses Research and development or, R&D, expenses for fiscal 2011 increased $10.2 million from fiscal 2010. The increase was primarily attributable toincreased consulting fees, materials and supplies of $4.5 million for internal development projects, along with externally sponsored clinical researchprograms and higher compensation and employee related costs, including contract labor, recruiting and relocation of $2.0 million to support ongoingresearch projects. Additionally, we have incurred $4.0 million for R&D expenses from our TomoTherapy subsidiary, of which $1.4 million was relatedto severance expense, $0.9 million of employee related expenses, $0.7 million related to the accelerated vesting of stock options and restricted stockawards and $0.3 million of consulting expenses. R&D expenses for fiscal 2010 decreased $4.5 million from fiscal 2009. The decrease was primarily attributable to a decrease of $1.4 million insalaries and benefits and $0.3 million in share-based compensation related to lower headcount in fiscal 2010. We increased efforts to control spending in2010 resulting in the reduction of $1.6 million in contract labor and consulting fees and $0.7 million in materials. Additionally, we incurred $0.3 millionof severance expense in fiscal 2009 related to a Workforce Alignment Plan, implemented in order to reduce headcount and improve efficiency andproductivity, which we did not incur in fiscal 2010. We expect R&D expenses to increase in fiscal 2012 from fiscal 2011 due to development projects for the CyberKnife Systems and TomoTherapySystems.General and administrative expenses General and administrative expenses for fiscal 2011 increased $21.2 million from fiscal 2010. The increase was primarily attributable to$15.7 million of acquisition-related expenses (including costs of severance, share-based compensation arising from acceleration of stock options andrestricted stock awards for TomoTherapy employees, fees to investment bankers, integration planning, legal and accounting services), higher employeerelated expense of $0.7 million, higher insurance expense of $0.4 million and increased travel expense of $0.3 million. Additionally, we have incurred$5.1 million85 Years Ended June 30, (Dollars in thousands) 2011 2010 2009 FY11 vs. FY10 FY10 vs. FY09 Research anddevelopment $41,687 $31,523 $35,992 $10,164 32%$(4,469) (12)% % of net revenue 18.8% 14.2% 15.4% Years Ended June 30, (Dollars in thousands) 2011 2010 2009 FY11 vs. FY10 FY10 vs. FY09 General andadministrative $56,657 $35,472 $36,223 $21,185 60%$(751) (2)% % of net revenue 25.5% 16.0% 15.5% Table of Contentsfor general and administrative expenses from our TomoTherapy subsidiary, primarily consisting of $3.6 million in accelerated vesting of stock optionsand restricted stock awards, $0.9 million in employee related expenses and $0.2 million of consulting expense. General and administrative expenses for fiscal 2010 decreased by $0.8 million from fiscal 2009. The decrease was primarily attributable to adecrease of $1.3 million in severance and $1.9 million in share-based compensation as compared to fiscal 2009, when we implemented a WorkforceAlignment Plan, in order to reduce headcount and improve efficiency and productivity. We increased efforts to control spending in 2010 resulting in thereduction of $1.2 million in contract labor, recruiting cost and rent. Further, bad debt expense decreased $0.8 million year over year primarily due to theresolution of prior year reserves. The decrease in general and administrative expense was partially offset by a $4.3 million increase in consultingservices, primarily legal and tax fees, associated with the strategic alliance negotiations with Siemens and the shareholder lawsuit. We expect general and administrative expenses to increase in fiscal 2012 from fiscal 2011 due to the acquisition of TomoTherapy. We expect toincur costs to integrate the general and administrative functions including severance costs, Enterprise Resource Planning system consolidation expenses,legal entity consolidation and management, as well as higher ongoing costs for services such as insurance, accounting and tax due to the increased sizeof the company.Other income, net Other income, net for fiscal 2011 increased $2.3 million from fiscal 2010. The increase was primarily attributable to an increase of $4.1 millionrelated to foreign currency transaction gains as a result of the appreciation of the Euro-U.S. dollar foreign exchange rate and its effects on theremeasurement of balances denominated in Euros. This was partially offset by a decrease in net interest income of $1.3 million due to lower averageinterest rates earned on amounts kept in interest bearing accounts during fiscal 2011 compared to fiscal 2010. Other income, net for fiscal 2010 decreased $3.1 million from fiscal 2009. We recorded $1.8 million of interest income in fiscal 2010, whichrepresented a $2.1 million decline from fiscal 2009 due to a decrease in both the average daily balances kept in interest bearing accounts and the interestrates earned on amounts kept in those accounts during the year. Interest income was offset by $1.7 million in foreign currency transaction loss resultingfrom the decline in the Euro's international conversion rate.Provision for income taxes The provision for income taxes was higher in fiscal 2011 compared to fiscal 2010 due to $0.2 million of additional foreign taxes, primarilyresulting from higher income in fiscal 2011 combined with a federal tax benefit of $0.9 million recorded in fiscal 2010 resulting from enactment of TheWorker, Homeownership, and Business Assistance Act of 2009, which permits some relief from federal alternative minimum tax.86 Years Ended June 30, (Dollars in thousands) 2011 2010 2009 FY11 vs. FY10 FY10 vs. FY09 Other income, net $2,288 $1 $3,082 $2,287 nm $(3,081) (100)% % of net revenue 1.0% 0.0% 1.3% nm—not meaningful Years Ended June 30, (Dollars in thousands) 2011 2010 2009 FY11 vs. FY10 FY10 vs. FY09 Provision for (benefit from) incometaxes $1,116 $(4)$55 $1,120 nm $(59) (107)% % of net revenue 0.50% 0.0% 0.0% Table of Contents The provision for income taxes for fiscal 2010 decreased $59,000 from fiscal 2009, resulting in a $4,000 net benefit. In fiscal 2010, we recordedan increase in foreign taxes of $0.4 million as compared to the prior year as the result of changes in our jurisdictional mix of income. Federal taxesreflected $0.7 million additional benefit compared to the prior year due to benefits we recognized as the result of the enactment of The Worker,Homeownership, and Business Assistance Act of 2009, which permits some relief from federal alternative minimum tax. As of June 30, 2011, we had federal and state net operating loss carryforwards of $116.1 million and $45.9 million, respectively, including$72.0 million federal net operating loss carryforwards and $18.0 million of state net operating loss carryforwards from the acquisition of TomoTherapy.These federal and state net operating loss carryforwards are available to offset future taxable income, if any, in varying amounts and will begin to expirein 2019 for federal and 2015 for state purposes, respectively. Such net operating loss carryforwards include tax benefits from employee option exercisesin excess of the share-based compensation expense that has been recognized for those awards in accordance with Accounting Standards CodificationTopic 718, Stock Compensation. We will record approximately $7.3 million as a credit to additional paid-in capital if and when such excess benefits areultimately realized. We also had federal and state research and development tax credit carryforwards of approximately $7.6 million and $7.5 million,respectively. If not utilized, the federal tax credit carryforwards will begin to expire in 2025, while the state tax credits have no expiration date. Inaddition, among other matters, realization of the entire deferred tax asset is dependent on our ability to generate sufficient taxable income prior to theexpiration of the carryforwards. Due to the inconsistent history of net operating income as adjusted for permanent differences, we cannot conclude thatthe net domestic deferred tax assets will more likely than not be realized. Accordingly, we have recorded a full valuation allowance against our domesticnet deferred tax assets. At June 30, 2011, there was no provision for U.S. income tax for undistributed earnings of our foreign subsidiaries as it is currently our intentionto reinvest these earnings indefinitely in operations outside the U.S. If repatriated, these earnings could result in a tax expense at the current U.S. Federalstatutory tax rate of 35%, subject to available net operating losses and other factors. Subject to limitation, tax on undistributed earnings may also bereduced by foreign tax credits that may be generated in connection with the repatriation of earnings.Share-Based Compensation Expense Share-based compensation expense was recorded net of estimated forfeitures for fiscal 2011, 2010 and 2009 such that expense was recorded onlyfor those share-based awards that are expected to vest. For fiscal 2011, 2010 and 2009, we recorded $13.4 million, $10.6 million and $15.5 million,respectively, of share-based compensation expense, net of estimated forfeitures, for stock options, 2007 Employee Stock Purchase Plan, or ESPPshares issued, restricted stock units granted to employees and restricted stock awards assumed in connection with the acquisition of TomoTherapy. As of June 30, 2011, there was approximately $12.4 million, net of estimated forfeitures, of unrecognized compensation cost related to unvestedstock options, ESPP, restricted stock awards and restricted stock units which we expect to be recognized over a weighted average period from 0.4 to2.6 years.Liquidity and Capital Resources At June 30, 2011, we had $95.9 million in cash and cash equivalents. Our existing cash and cash equivalents balances may decline in fiscal 2012in the event of a weakening of the global economy or changes in our planned cash outlay. Cash from operations could also be affected by various risksand uncertainties, including, but not limited to the risks detailed in Part I, Item 1A titled "Risk Factors." However, based on our current business planand revenue prospects, we believe that we will have87Table of Contentssufficient cash resources and anticipated cash flows to continue in operation for at least the next 12 months. On August 1, 2011, we issued $100 million aggregate principal amount of our 3.75% Convertible Senior Notes due 2016, which we refer to as theNotes, to certain qualified institutional buyers or QIBs. The Notes were offered and sold to the QIBs pursuant to Rule 144A under the Securities Act of1933, as amended. We received net proceeds of approximately $96.3 million from the offering of the Notes, after deducting the initial purchaser'sdiscount and commission and the estimated expenses of the Notes offering payable by us. The Notes bear interest at a rate of 3.75% per year, payablesemi-annually in arrears in cash on February 1 and August 1 of each year, beginning on February 1, 2012. The Notes will mature on August 1, 2016,unless earlier repurchased, redeemed or converted. On or after August 1, 2014 and prior to the maturity date, we may redeem for cash all or a portion ofthe Notes if the closing sale price of our common stock exceeds 130% of the applicable conversion price (the initial conversion price is approximately$9.47 per share of common stock) of such Notes for at least 20 trading days during any consecutive 30 trading-day period (including the last tradingday of such period).Years ended June 30, 2011, 2010 and 2009Cash Flows From Operating Activities. Net cash provided by operating activities was $12.4 million for fiscal 2011. Our net loss of $27.1 million contributed to the negative cash flowsfrom working capital changes, including a decrease in deferred revenue, net of deferred cost of revenue of $6.5 million, an increase in inventories of$4.3 million and an increase in prepaid expenses and other current assets of $1.3 million. This decrease was offset primarily by an increase in accountspayable and accrued liabilities of $20.5 million and a decrease in accounts receivable of $8.7 million. The increase in accounts payable was due to timingdifferences between the receipt of goods and service and vendor payments. Non-cash charges included primarily $13.4 million of share-basedcompensation charges, $7.6 million of depreciation and amortization expense, and write-down of inventories of $1.7 million. Net cash used in operating activities was $5.1 million for fiscal 2010. Our net income of $2.8 million during fiscal 2010 was offset by a decreasein deferred revenue, net of deferred cost of revenue, of $18.6 million, an increase in prepaid expenses and other current assets of $4.2 million, anincrease in accounts receivable of $2.5 million and a decrease in accounts payable of $5.4 million. The decrease in deferred revenue, net of deferred costof revenue, was primarily a result of the recognition of revenue previously deferred for systems sold under our Platinum plan, partially offset bydifferences between invoicing customers for products and services and the recognition of the invoicing as revenue. The increase in prepaid expensesand other current assets was due to an insurance receivable amount recorded for insurance claims. Accounts payable decreased as a result of the timingof the receipt of invoices and when payment was made. Positive cash flow from working capital changes includes an increase of $4.4 million of accruedliabilities, which was primarily due to an increase in compensation accruals and taxes payable due to higher profitability compared to the prior fiscalyear. Non-cash charges included $10.6 million of share-based compensation, $0.8 million of charges for write-downs of inventories and loss ondisposal of property and equipment, $0.4 million reduction in the provision for bad debts and $7.1 million of depreciation and amortization. Net cash used in operating activities was $3.7 million for fiscal 2009. Our net income of $0.6 million during fiscal 2009 was offset by an increasein accounts receivable of $2.8 million, a decrease in deferred revenue, net of deferred cost of revenue, of $16.5 million, and an increase in inventories of$9.7 million. The increase in accounts receivable was primarily due to a timing difference between the shipment of products and the receipt of customerpayment. The decrease in deferred revenue, net of deferred cost of revenue, was primarily the result of the recognition of revenue88Table of Contentspreviously deferred for systems sold under our Platinum plan, partially offset by differences between invoicing customers for products and services andthe recognition of the invoicing as revenue. The increase in inventories was due primarily to an increase in our business volume and the increase in ourworldwide installed base and associated service inventory requirements. Positive cash flow from working capital changes include an increase in accruedliabilities of $4.9 million, of which $1.3 million was related to the inventory investigation in the first quarter and the balance was due to the timingdifferences between the receipt of goods and service and vendor payments and a decrease in restricted cash of $4.3 million. The decrease in restrictedcash is due to the release of amounts related to contracts with customers requiring that deposited cash amounts be secured via letter of credit untildelivery of the CyberKnife unit occurs. Non-cash charges included $15.5 million of share-based compensation, $2.7 million of charges for write-downsof inventory and $6.7 million of depreciation and amortization expense.Cash Flows From Investing Activities. Net cash provided by investing activities was $31.4 million for fiscal 2011, which was attributable to net marketable security activities of$105.7 million, which consisted of $206.4 million of sales and maturities of marketable securities, offset by $100.7 million in purchases. Cash used tofund the acquisition of TomoTherapy, net of cash acquired, was $70.3 million. In addition, we used $4.0 million of cash for purchases of property andequipment. Net cash provided by investing activities was $10.5 million for fiscal 2010 and was attributable to net marketable security activities of$15.7 million, which consisted of $127.1 million of sales and maturities of marketable securities, offset by $111.4 million in purchases. The net increasein investment activity for fiscal 2010 was due to the exercise of the put option with UBS and the sale of our ARS holdings on June 30, 2010. We used$5.1 million of cash for purchases of property and equipment. Net cash used in investing activities was $2.4 million for fiscal 2009 and was attributable to net marketable security activities of $1.8 million,which consisted of $157.7 million of sales and maturities of marketable securities, offset by $155.9 million in purchases. We also used $4.2 million ofcash for purchases of property and equipment.Cash Flows From Financing Activities. Net cash provided by financing activities was $5.6 million for fiscal 2011 and was primarily attributable to proceeds from the exercise of commonstock options and the purchase of common stock under our ESPP. Net cash provided by financing activities was $3.8 million and $5.8 million for fiscal 2010 and 2009, respectively, and was primarily attributable toproceeds from the exercise of common stock options and the purchase of common stock under our ESPP.Operating Capital and Capital Expenditure Requirements Our future capital requirements depend on numerous factors. These factors include but are not limited to the following:•Revenue generated by sales of our products, our shared ownership program and service plans; •Costs associated with our sales and marketing initiatives and manufacturing activities; •Facilities, equipment and IT systems required to support current and future operations; •Rate of progress and cost of our research and development activities;89Table of Contents•Costs of obtaining and maintaining FDA and other regulatory clearances of our products; •Effects of competing technological and market developments; •Number and timing of acquisitions and other strategic transactions; and •Costs associated with the integration of TomoTherapy. We believe that our current cash and cash equivalents will be sufficient to meet our anticipated cash needs for working capital and capitalexpenditures for at least 12 months. We estimate that capital expenditures will be in the range of $20 million to $25 million during fiscal 2012. If thesesources of cash and cash equivalents are insufficient to satisfy our liquidity requirements, we may seek to sell additional equity or debt securities orobtain additional credit facilities. The sale of additional equity or convertible debt securities could result in dilution to our stockholders. If additionalfunds are raised through the issuance of debt securities, these securities could have rights senior to those associated with our common stock and couldcontain covenants that would restrict our operations. Additional financing may not be available at all, or in amounts or on terms acceptable to us. If weare unable to obtain this additional financing, we may be required to reduce the scope of our planned product development and marketing efforts.Contractual Obligations and Commitments The following is a schedule summarizing our obligations to make future payments under contractual obligations as of June 30, 2011 and the Notesthat we issued in August 2011:Off Balance Sheet Arrangements We do not have any off balance sheet arrangements.Critical Accounting Policies and Estimates The discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have beenprepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). The preparation of these consolidatedfinancial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure ofcontingent assets and liabilities at the date of the consolidated financial statements, as well as revenue and expenses during the reporting periods. Weevaluate our estimates and judgments on an ongoing basis. We base our estimates on historical experience and on various other factors we believe arereasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities. Actualresults could therefore differ materially from those estimates if actual conditions differ from our assumptions.90 Payments due by period Total Less than1 year 1 - 3 years 3 - 5 years More than5 years Notes(1) $118,751 $3,438 $11,250 $104,063 $— Operating leases 28,828 7,076 16,042 5,275 435 Total $147,579 $10,514 $27,292 $109,338 $435 (1)These amounts represent principal and interest cash payments over the life of the debt obligations, including anticipated interestpayments that are not recorded on our consolidated balance sheet. Any conversion, redemption or purchase of Notes wouldimpact our cash payments.Table of Contents All of our significant accounting policies and methods used in the preparation of our consolidated financial statements are described in Note 2,Summary of Significant Accounting Policies, in Notes to the consolidated financial statements. The methods, estimates and judgments that we use inapplying our accounting policies require us to make difficult and subjective judgments, often as a result of the need to make estimates regarding mattersthat are inherently uncertain. Management believes the critical accounting policies and estimates are those related to revenue recognition, inventoryvaluation, share-based compensation, income taxes, legal and other contingencies and corporate bonus accruals.Revenue Recognition In the first quarter of fiscal 2011, we adopted Accounting Standards Update, or ASU, 2009-13, Multiple-Deliverable Revenue Arrangements(amendments to Accounting Standards Codification, or ASC, Topic 605, Revenue Recognition), and ASU 2009-14, Certain Arrangements ThatInclude Software Elements (amendments to Financial Accounting Standards Board, or FASB, ASC Topic 985, Software). We adopted these newstandards on a prospective basis; therefore, they apply only to revenue arrangements entered into or materially modified beginning July 1, 2010. Therevised guidance primarily provides two significant changes: 1) it requires us to allocate revenues in an arrangement using best estimated selling prices,or BESP, of deliverables if we do not have VSOE or third-party evidence, or TPE, of selling price; and 2) it eliminates the residual method and requiresus to allocate revenue using the relative selling price method. The BESP is established considering multiple factors including, but not limited to, pricingpractices, internal costs, geographies and gross margin. The determination of BESP is made through consultation with and formal approval by ourpricing committee, taking into consideration the overall go-to-market pricing strategy. We may modify or develop new go-to-market practices in thefuture. As these go-to-market strategies evolve, we may modify our pricing practices in the future, which may result in changes in selling prices,impacting both VSOE and BESP. These factors may result in a different allocation of revenue to the deliverables in multiple element arrangements fromthe current fiscal year, which may change the pattern and timing of revenue recognition for these elements but will not change the total revenuerecognized for the arrangement. We frequently enter into sales arrangements with customers that contain multiple elements or deliverables such as hardware, software and services.In order to comply with GAAP, we have to make a number of reasoned judgments with respect to elements of these sales arrangements, including howto allocate the proceeds received from an arrangement, whether there are multiple elements in the arrangement, whether any undelivered elements areessential to the functionality of the delivered elements and the appropriate timing of revenue recognition with respect to these arrangements. Duringfiscal 2011, we accounted for pre-adoption multiple elements arrangements which have not subsequently been materially modified under the residualmethod and allocated arrangement consideration to each element based upon vendor specific objective evidence, or VSOE, of fair value of the respectiveelements. VSOE of fair value for each element is based upon our historical standard rates charged for the product or service when such product orservice is sold separately or based upon the price established by our management-comprised pricing committee, which has the relevant authority whenthat product or service is not yet sold separately. Changes to the elements in an arrangement and the ability to establish VSOE of the fair value for thoseelements could affect the timing and the amount of revenue recognition. Revenue recognition also depends on all or a combination of the timing of shipment, completion of installation, customer acceptance and thereadiness of customers' facilities. If shipments are not made on scheduled timelines, installation schedules are delayed or if the products are not acceptedby the customer in a timely manner, our reported revenues may differ materially from expectations. Examples of the impact of these factors include the following. If the shipment of one of our systems that sold for $4.0 million was delayed, systemrevenue would be lowered by this $4.0 million,91Table of Contentsless any amounts deferred for service, training, or other future deliverables. If one of our systems was sold for $4.0 million and the sale involvedmultiple elements including training and service, a 5% change in BESP of the system could result in an approximately $25,000 impact to the amount ofrevenue allocated and recognized as product revenue rather than as service revenue.Business Combinations and Intangible Asset Impairment Our methodology for allocating the purchase price relating to business combinations is determined through established valuation techniques. Theallocation of the purchase price to intangible assets requires us to make significant estimates and assumptions, including estimates of future cash flowsexpected to be generated by the acquired assets and appropriate discount rate for those cash flows. Goodwill represents the excess of the purchase priceover the fair value of tangible and identified intangible net assets of businesses acquired. Goodwill is evaluated for impairment on an annual basis orwhen impairment indicators are present. We make judgments about the recoverability of purchased intangible assets with finite lives whenever events or changes in circumstances indicatethat an impairment may exist. Recoverability of purchased intangible assets with finite lives is measured by comparing the carrying amount of the assetto the future undiscounted cash flows the asset is expected to generate. Impairment, if any, is measured as the amount by which the carrying valueexceeds the fair value of the impaired asset. We review indefinite-lived intangible assets for impairment annually or whenever events or changes incircumstances indicate the carrying value may not be recoverable. Recoverability of indefinite-lived intangible assets is measured by comparing thecarrying amount of the asset to the future discounted cash flows the asset is expected to generate. If the asset is considered to be impaired, the amount ofany impairment is measured as the difference between the carrying value and the fair value of the impaired asset. Assumptions and estimates about future values and remaining useful lives of our purchased intangible assets are complex and subjective. They canbe affected by a variety of factors, including external factors such as industry and economic trends and internal factors such as changes in our businessstrategy and our internal forecasts.Inventories The valuation of inventory requires us to estimate obsolete or excess inventory as well as damaged inventory. The determination of obsolete orexcess inventory requires us to estimate the future demand for our products. We regularly review inventory quantities on hand and adjust for excess andobsolete inventory based primarily on historical usage rates and our estimates of product demand to support future sales and service. If our demandforecast for specific products is greater than actual demand and we fail to reduce purchasing and manufacturing output accordingly, we could berequired to write off inventory, which would negatively impact our gross margin. For example, if the actual amount of inventory that is disposed of asobsolete, excess or damaged is 10% larger or smaller than the amount that we estimated at June 30, 2011, then we would need to increase or decreasecost of sales by approximately $1.7 million.Share-Based Compensation Expense We use the Black-Scholes option valuation model to estimate the fair value of stock options and Employee Stock Purchase Plan shares. The Black-Scholes model requires the input of highly subjective assumptions. The most significant assumptions are our estimates of the expected volatility and theexpected term of the award. Our expected volatility is derived from the historical volatilities of several unrelated public companies within industriesrelated to our business because we do not have sufficient trading history on our common stock. When making the selections of our peer companieswithin92Table of Contentsindustries related to our business to be used in the volatility calculation, we also considered the stage of development, size and financial leverage ofpotential comparable companies. In addition, as our historical share option exercise experience as a publicly-held entity does not provide a reasonablebasis upon which to estimate the expected term, we estimate the expected term of options granted by taking the average of the vesting term and thecontractual term of the option, as illustrated by the simplified method. The assumptions used in calculating the fair value of share-based payment awardsrepresent management's best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, iffactors change and we use different assumptions, our share-based compensation expense could be materially different in the future. We recognize compensation cost for only those shares expected to vest over the requisite service period of the award. We estimate our forfeiturerate based on an analysis of our actual forfeitures and will continue to evaluate the appropriateness of the forfeiture rate based on recent forfeitureactivity and expected future employee turnover. Quarterly changes in the estimated forfeiture rate can have a significant effect on reported share-basedcompensation expense, as the cumulative effect of adjusting the rate for all expense amortization is recognized in the period the forfeiture estimate ischanged. If a revised forfeiture rate is higher than the previously estimated forfeiture rate, an adjustment is made that will result in a decrease to theshare-based compensation expense recognized in the consolidated financial statements. If a revised forfeiture rate is lower than the previously estimatedforfeiture rate, an adjustment is made that will result in an increase to the share-based compensation expense recognized in the consolidated financialstatements. If the estimated forfeiture rate was higher or lower by five percentage points, our share-based compensation expense related to stock optionswould increase or decrease by approximately 4%, respectively.Income Taxes We calculate our current and deferred tax provisions based on estimates and assumptions that could differ from the actual results reflected in ourincome tax returns filed during the subsequent year. We record adjustments based on filed returns when we have identified and finalized them, which isgenerally in the third quarter of the subsequent year for U.S. federal and state provisions, respectively. We have placed a full valuation allowance on allnet U.S. deferred tax assets because realization of these tax benefits through future taxable income cannot be reasonably assured. We intend to maintainthe valuation allowance until sufficient positive evidence exists to support the reversal of the valuation allowance. Any decision to reverse part or all ofthe valuation allowance would be based on our estimate of future profitability. If our estimate were to be wrong we could be required to chargepotentially significant amounts to income tax expense to establish a new valuation allowance. Our effective tax rate includes the impact of certain undistributed foreign earnings for which we have not provided U.S. taxes because we plan toreinvest such earnings indefinitely outside the United States. We plan foreign earnings remittance amounts based on projected cash flow needs as wellas the working capital and long-term investment requirements of our foreign subsidiaries and our domestic operations. Material changes in our estimatesof cash, working capital and long-term investment requirements in the various jurisdictions in which we do business could impact our effective tax rate.We are subject to income taxes in the United States and certain foreign countries, and we are subject to corporate income tax audits in some of thesejurisdictions. We believe that our tax return positions are fully supported, but tax authorities are likely to challenge certain positions, which may not befully sustained. However, our income tax expense includes amounts intended to satisfy income tax assessments that result from these challenges.Determining the income tax expense for these potential assessments and recording the related assets and liabilities requires management judgments andestimates. We evaluate our uncertain tax positions in accordance with the guidance for accounting for uncertainty in income taxes. We believe that ourreserve for uncertain tax positions is adequate. We review our reserves quarterly, and we may adjust such reserves because of proposed assessments bytax93Table of Contentsauthorities, changes in facts and circumstances, issuance of new regulations or new case law, previously unavailable information obtained during thecourse of an examination, negotiations between tax authorities of different countries concerning our transfer prices, or the expiration of statutes oflimitations.Loss Contingencies As discussed in "Note 8, Commitments and Contingencies", in Notes to consolidated financial statements, we are involved in various lawsuits,claims and proceedings that arise in the ordinary course of business. We record a provision for a liability when we believe that it is both probable that aliability has been incurred and the amount can be reasonably estimated. Significant judgment is required to determine both probability and the estimatedamount. We review these provisions at least quarterly and adjust these provisions to reflect the impact of negotiations, settlements, rulings, advice oflegal counsel, and updated information. Currently, we do not have a potential liability related to any current legal proceedings and claims that wouldindividually or in the aggregate materially adversely affect our financial condition or operating results. Litigation is inherently unpredictable and issubject to significant uncertainties, some of which are beyond our control. Should any of these estimates and assumptions change or prove to have beenincorrect, we could incur significant charges related to legal matters which could have a material impact on our results of operations, financial positionand cash flows.Corporate Bonus Expense and Accruals We record accruals for estimated corporate bonus expense which is paid out in the first quarter of the subsequent fiscal year. Our expense accrualsfor fiscal 2011 are based on our results for three factors: net revenue, pre-tax operating income (loss) and orders to backlog. If we underestimate oroverestimate any of these factors during a fiscal year, adjustments to bonus expense and accruals may be necessary in subsequent periods during theyear. For example, if our actual results as of the end of a fiscal year yielded a bonus attainment that varied by 5% from our prior estimate, we wouldneed to increase or decrease our bonus expense accrual in the fourth quarter of the fiscal year by approximately $0.4 million.Item 7A. QUANTITATIVE & QUALITATIVE DISCLOSURES ABOUT MARKET RISK We do not utilize derivative financial instruments, derivative commodity instruments or other market risk sensitive instruments, positions ortransactions.Foreign Currency Exchange Rate Risk As of June 30, 2011, there were no amounts in deferred revenue for CyberKnife and TomoTherapy System contracts denominated in a foreigncurrency, in which system revenue would be recognized in future periods. Future fluctuations in the value of the U.S. dollar may affect the pricecompetitiveness of our products outside the United States. For direct sales outside the United States, we will sell in both U.S. dollars and localcurrencies, which could expose us to additional foreign currency risks, including changes in currency exchange rates. Our operating expenses incountries outside the United States, including some of our commissions related to sales of the CyberKnife and TomoTherapy Systems, are payable inforeign currencies and therefore expose us to currency risk. To the extent that management can predict the timing of payments under sales contracts orfor operating expenses that are denominated in foreign currencies, we may engage in hedging transactions to mitigate such risks in the future.94Table of ContentsInterest Rate Risk At June 30, 2011, we had $95.9 million of cash and cash equivalents. Our earnings are affected by changes in interest rates due to the impact thosechanges have on interest income generated from our cash balances. We believe that while the instruments we hold are subject to changes in the financialstanding of the issuer of such securities, and except as described below, we are not subject to any material risks arising from changes in interest rates,foreign currency exchange rates, commodity prices, equity prices or other market changes that affect market risk sensitive instruments. However, shouldinterest rates increase, the market value of our investments may decline. This could result in a realized loss if we were forced to sell any of ourinvestments before their scheduled maturity. At the end of fiscal 2011, we were not subject to significant levels of interest rate risk as a small amount ofour cash was invested in money market funds.95Table of ContentsItem 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ACCURAY INCORPORATEDINDEX TO CONSOLIDATED FINANCIAL STATEMENTS 96 Page Report of Independent Registered Public Accounting Firm 97 Consolidated Balance Sheets 98 Consolidated Statements of Operations 99 Consolidated Statement of Stockholders' Equity 100 Consolidated Statements of Cash Flows 101 Notes to Consolidated Financial Statements 102 Table of ContentsREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and StockholdersAccuray Incorporated We have audited the accompanying consolidated balance sheets of Accuray Incorporated (a Delaware Corporation) and subsidiaries (the"Company") as of June 30, 2011 and 2010, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of thethree years in the period ended June 30, 2011. Our audits of the consolidated basic financial statements included the financial statement schedule listedin the index appearing under Item 15(a)(2). These financial statements and financial statement schedule are the responsibility of the Company'smanagement. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standardsrequire that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. Anaudit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statementpresentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of AccurayIncorporated and subsidiaries as of June 30, 2011 and 2010, and the results of their operations and their cash flows for each of the three years in theperiod ended June 30, 2011 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, therelated financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all materialrespects, the information set forth therein. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), AccurayIncorporated's internal control over financial reporting as of June 30, 2011, based on criteria established in Internal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated September 19, 2011 expressed anadverse opinion thereon./s/ GRANT THORNTON LLPSan Francisco, CaliforniaSeptember 19, 201197Table of ContentsAccuray Incorporated Consolidated Balance Sheets (in thousands, except share and per share amounts) June 30, 2011 2010 Assets Current assets: Cash and cash equivalents $95,906 $45,434 Restricted cash 3,172 22 Short-term available-for-sale securities — 99,881 Accounts receivable, net of allowance for doubtful accounts of $324 and $115 at June 30,2011 and 2010, respectively 61,853 37,955 Inventories 97,836 28,186 Prepaid expenses and other current assets 21,115 19,356 Deferred cost of revenue—current 5,840 7,889 Total current assets 285,722 238,723 Property and equipment, net 44,823 14,684 Goodwill 54,474 4,495 Intangible assets, net 66,039 388 Deferred cost of revenue—noncurrent 2,258 3,213 Other assets 2,468 1,681 Total assets $455,784 $263,184 Liabilities and stockholders' equity Current liabilities: Accounts payable $38,645 $10,317 Accrued compensation 27,406 10,786 Other accrued liabilities 43,012 10,669 Customer advances—current 25,829 12,884 Deferred revenue—current 68,152 42,019 Total current liabilities 203,044 86,675 Long-term liabilities: Long-term other liabilities 6,321 1,059 Deferred revenue—noncurrent 6,092 5,374 Total liabilities 215,457 93,108 Commitments and contingencies Stockholders' equity Preferred stock, $0.001 par value; authorized: 5,000,000 shares; no shares issued andoutstanding — — Common stock, $0.001 par value; authorized: 100,000,000 shares; issued: 72,199,837 and60,666,974 shares at June 30, 2011 and 2010, respectively; outstanding: 70,059,819 and58,526,956 shares at June 30, 2011 and 2010, respectively 70 59 Additional paid-in capital 373,963 287,764 Accumulated other comprehensive income (loss) 127 (71) Accumulated deficit (144,385) (117,676) Total stockholders' equity 229,775 170,076 The accompanying notes are an integral part of these consolidated financial statements.98 Noncontrolling interest 10,552 — Total equity 240,327 170,076 Total liabilities and stockholders' equity $455,784 $263,184 Table of ContentsAccuray Incorporated Consolidated Statements of Operations (in thousands, except per share amounts) The accompanying notes are an integral part of these consolidated financial statements.99 Years Ended June 30, 2011 2010 2009 Net revenue: Products $138,595 $143,187 $162,908 Services 80,490 77,504 66,344 Other 3,199 934 4,346 Total net revenue 222,284 221,625 233,598 Cost of revenue: Cost of products 55,524 66,216 69,679 Cost of services 56,218 50,732 44,591 Cost of other 3,300 659 4,038 Total cost of revenue 115,042 117,607 118,308 Gross profit 107,242 104,018 115,290 Operating expenses: Selling and marketing 37,181 34,187 45,493 Research and development 41,687 31,523 35,992 General and administrative 56,657 35,472 36,223 Total operating expenses 135,525 101,182 117,708 Income (loss) from operations (28,283) 2,836 (2,418) Other income, net 2,288 1 3,082 Income (loss) before provision for (benefit from) income taxes (25,995) 2,837 664 Provision for (benefit from) income taxes 1,116 (4) 55 Net income (loss) (27,111) 2,841 609 Noncontrolling interest (429) — — Net income (loss) attributable to stockholders $(26,682)$2,841 $609 Net income (loss) per share: Basic net income (loss) per share $(0.44)$0.05 $0.01 Diluted net income (loss) per share $(0.44)$0.05 $0.01 Weighted average common shares outstanding used in computing net income(loss) per share: Basic 60,085 57,560 55,413 Diluted 60,085 60,191 58,729 Table of ContentsAccuray Incorporated Consolidated Statement of Stockholders' Equity (in thousands, except share Amounts) Common Stock AccumulatedOtherComprehensiveIncome (Loss) TotalAccurayStockholders'Equity AdditionalPaid-InCapital AccumulatedDeficit Non-ControllingInterests TotalEquity Shares Amount Balances atJune 30, 2008 54,579,846 $55 $252,901 $(1,067)$(121,126)$130,763 $— $130,763 Exercise of stockoptions, net 1,450,120 2 4,106 — — 4,108 — 4,108 Issuance ofcommon stockunder employeestock purchaseplan 437,005 — 1,667 — — 1,667 — 1,667 Issuance ofrestricted stock 176,558 — — — — — — Stock-basedcompensation — — 15,403 — — 15,403 — 15,403 Income taxcharges fromemployee stockplans — — (131) — — (131) — (131)Net income — — — — 609 609 609 Cumulativetranslationadjustment — — — (14) — (14) — (14)Unrealized gainon investments,net — — — 1,497 — 1,497 — 1,497 Totalcomprehensiveincome 2,092 Balances atJune 30, 2009 56,643,529 57 273,946 416 (120,517) 153,902 — 153,902 Exercise of stockoptions, net 1,313,749 2 2,028 — — 2,030 — 2,030 Issuance ofcommon stockunder employeestock purchaseplan 399,283 — 1,807 — — 1,807 — 1,807 Issuance ofrestricted stock 170,395 — — — — — — — Stock-basedcompensation — — 10,397 — — 10,397 — 10,397 Income taxcharges fromemployee stockplans — — (414) — — (414) — (414)Net income — — — — 2,841 2,841 — 2,841 Cumulativetranslationadjustment — — — (57) — (57) — (57)Unrealized loss oninvestments, net — — — (430) — (430) — (430) Totalcomprehensiveincome 2,354 Balances atJune 30, 2010 58,526,956 59 287,764 (71) (117,676) 170,076 — 170,076 Deconsolidationof Morphormics — — — — (27) (27) — (27)Exercise of stockoptions, net 1,396,685 1 3,600 — — 3,601 — 3,601 Issuance ofThe accompanying notes are an integral part of these consolidated financial statements.100common stockunder employeestock purchaseplan 392,084 — 2,000 — — 2,000 — 2,000 Issuance ofrestricted stock 201,992 — — — — — — Shares issued inconnection withacquisition ofTomoTherapy 9,112,511 10 67,332 — — 67,342 — 67,342 Shares issued inconnection withthe assumptionof restrictedstock awardsrelated toacquisition ofTomoTherapy 429,591 — — — — — — Restricted stockawards assumedin connectionwith acquisitionofTomoTherapy — — 1,191 — — 1,191 — 1,191 Stock optionsassumed inconnection withacquisition ofTomoTherapy — — 2,234 — — 2,234 — 2,234 Stock-basedcompensation — — 9,842 — — 9,842 — 9,842 Noncontrollinginterest inCPAC resultingfrom acquisitionofTomoTherapy — — — — — — 10,981 10,981 Net loss — — — — (26,682) (26,682) (429) (27,111) Cumulativetranslationadjustment — — — 236 — 236 — 236 Change inunrealized lossoninvestments — — — (38) — (38) — (38) Totalcomprehensiveloss (26,484) (429) (26,913) Balances atJune 30, 2011 70,059,819 $70 $373,963 $127 $(144,385)$229,775 $10,552 $240,327 Table of ContentsAccuray Incorporated Consolidated Statements of Cash Flows (in thousands) Years Ended June 30, 2011 2010 2009 Cash Flows From Operating Activities Net income (loss) $(27,111)$2,841 $609 Adjustments to reconcile net income (loss) to net cash provided by (used in)operating activities: Depreciation and amortization 7,566 7,122 6,651 Share-based compensation 13,365 10,646 15,461 Tax charge from share-based compensation — (414) (131)Realized (gain) loss on investments (27) 316 (30)Unrealized loss on long-term trading securities, net of gain on put option — (251) 393 Provision for bad debts 239 (380) 496 Loss on write-down of inventories 1,698 626 2,730 Loss on disposal of property and equipment 312 195 342 Restricted cash — 438 4,303 Changes in assets and liabilities: Accounts receivable 8,698 (2,448) (2,817) Inventories (4,321) 244 (9,679) Prepaid expenses and other current assets (1,340) (4,230) 26 Deferred cost of revenue 7,586 8,980 22,010 Other assets 214 (228) (113) Accounts payable 10,662 (5,364) 1,833 Accrued liabilities 9,831 4,382 4,921 Customer advances (909) 20 (12,216) Deferred revenue (14,060) (27,568) (38,532) Net cash provided by (used in) operating activities 12,403 (5,073) (3,743)Cash Flows From Investing Activities Purchases of property and equipment (4,022) (5,130) (4,232)Acquisition of business, net of cash acquired (70,265) — — Purchase of investments (100,710) (111,429) (155,934)Sale and maturity of investments 206,414 127,086 157,732 Net cash provided by (used in) investing activities 31,417 10,527 (2,434)Cash Flows From Financing Activities Proceeds from issuance of common stock 3,601 2,030 4,108 Proceeds from employee stock purchase plan 2,000 1,807 1,667 Net cash provided by financing activities 5,601 3,837 5,775 Effect of exchange rate changes on cash 1,051 (692) 301 Net increase (decrease) in cash and cash equivalents 50,472 8,599 (101)Cash and cash equivalents at beginning of period 45,434 36,835 36,936 Cash and cash equivalents at end of period $95,906 $45,434 $36,835 Supplemental Disclosure of Cash Flow Information Income taxes paid $1,392 $60 $194 Non-cash financing activity: Fair value of common stock issued and vested options and restricted stockThe accompanying notes are an integral part of these consolidated financial statements.101 awards assumed in connection with acquisition $73,845 $— $— Table of ContentsAccuray Incorporated Notes to Consolidated Financial Statements 1. Description of BusinessOrganization Accuray Incorporated (the "Company") is incorporated in Delaware. The Company designs, develops and sells advanced medical radiationsystems for the treatment of tumors throughout the body. The CyberKnife Systems are advanced, image-guided robotic systems used to deliverradiosurgery for the treatment of solid tumors anywhere in the body. On June 10, 2011, the Company completed the acquisition of TomoTherapy Incorporated ("TomoTherapy") by acquiring all of TomoTherapy'scommon stock in exchange for cash and shares of Accuray common stock (for further information, see "Note 12, Acquisition"). TomoTherapy designs,manufactures and sells systems used to deliver advanced radiation therapy for the treatment of a wide range of cancer types. The consolidated financialstatements include the financial results of TomoTherapy prospectively from the date of acquisition.2. Summary of Significant Accounting PoliciesFiscal Year Through fiscal year 2009, the Company's fiscal years ended on the Saturday closest to June 30th, so that in a 52 week period, each fiscal quarterconsisted of 13 weeks. The additional week in a 53 week year was added to the fourth quarter, making such quarter consist of 14 weeks. Fiscal year2009 was comprised of 52 weeks. For ease of presentation purposes, the Company refers to June 30 as its fiscal year end. On June 23, 2009, theCompany's Board of Directors determined to change the Company's fiscal year end to June 30, beginning with fiscal 2010.Basis of Presentation and Principles of Consolidation The consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries and a variable interest entity, CompactParticle Acceleration Corporation ("CPAC") (for further information, see "Note 13 Investment in CPAC"). All significant inter-company transactionsand balances have been eliminated in consolidation.Reclassifications Certain amounts reported in previous periods have been reclassified to conform to the current period presentation. The reclassifications did notaffect previously reported revenues, total operating expense, operating income (loss), net income (loss), or stockholders' equity.Use of Estimates The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of Americarequires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and relateddisclosures at the date of the financial statements. Key estimates and assumptions made by the Company relate to share-based compensation, valuationallowances for deferred tax assets, estimate of allowance for doubtful accounts, valuation of excess and obsolete inventories, impairment of long-livedassets and goodwill, the fair value of purchase consideration paid and assets acquired and liabilities assumed in business combinations, deferred revenueand deferred cost of revenue and estimates of the fair value of certain investments. Actual results could differ materially from those estimates.102Table of ContentsAccuray IncorporatedNotes to Consolidated Financial Statements (Continued)2. Summary of Significant Accounting Policies (Continued)Foreign Currency The Company's international subsidiaries use their local currencies as their functional currencies. For those subsidiaries, assets and liabilities aretranslated at exchange rates in effect at the balance sheet date and income and expense accounts at the average exchange rate. Resulting translationadjustments are excluded from the determination of net income and are recorded in accumulated other comprehensive income (loss) as a separatecomponent of stockholders' equity. Net foreign currency exchange transaction gains or losses are included as a component of other income, net, in theCompany's consolidated statements of operations.Cash and Cash Equivalents The Company considers all highly liquid investments with original maturities of three months or less on the date of purchase to be cashequivalents. Cash equivalents consist of amounts invested in highly liquid investment accounts and money market accounts and amounted to $19,000and $1.8 million at June 30, 2011 and 2010, respectively. Cash and cash equivalent balances denominated in a foreign currency amounted to$28.3 million and $20.7 million at June 30, 2011 and 2010, respectively.Restricted Cash Restricted cash primarily relates to funds held related to VAT guarantees in a foreign jurisdiction and certain performance obligation guarantees.Restricted cash amounts were $3.2 million and $22,000 at June 30, 2011 and 2010, respectively.Marketable Securities The Company's available-for-sale securities on the consolidated balance sheets include commercial paper, corporate debt and debt issued by U.S.government sponsored enterprises. All marketable securities designated as available-for-sale are reported at estimated fair value, with unrealized gainsand losses recorded in stockholders' equity and included in accumulated other comprehensive income. Realized gains and losses on the sale of available-for-sale marketable securities are recorded in other income, net. The cost of available-for-sale marketable securities sold is based on the specificidentification method. Available-for-sale marketable securities with original maturities greater than approximately three months and remaining maturitiesof one year or less are classified as short-term available-for-sale marketable securities.Other-than-Temporary Impairment Assessment The Company regularly reviews all of its investments for other-than-temporary declines in fair value. The review includes but is not limited to(i) the consideration of the cause of the impairment, (ii) the creditworthiness of the security issuers, (iii) the length of time a security is in an unrealizedloss position, and (iv) the Company's positive intent and ability to hold the security for a period of time sufficient to allow for any anticipated recoveryin fair value.103Table of ContentsAccuray IncorporatedNotes to Consolidated Financial Statements (Continued)2. Summary of Significant Accounting Policies (Continued)Fair Value of Financial Instruments The carrying values of the Company's financial instruments including cash and cash equivalents, marketable securities, restricted cash, accountsreceivable and accounts payable are approximately equal to their respective fair values due to the relatively short-term nature of these instruments.Concentration of Credit Risk and Other Risks and Uncertainties The Company's cash and cash equivalents are mainly deposited with several major financial institutions. At times, deposits in these institutionsexceed the amount of insurance provided on such deposits. The Company has not experienced any losses in such accounts and believes that it is notexposed to any significant risk on these balances. There were no customers that represented 10% or more of total net revenue for the years ended June 30, 2011, 2010 and 2009. There was onecustomer whose accounts receivable balance was in excess of 10% of total accounts receivable at June 30, 2011. There were no customers whoseaccounts receivable balance was in excess of 10% of total accounts receivable at June 30, 2010. Accounts receivable are typically not collateralized. The Company performs ongoing credit evaluations of its customers and maintains reserves forpotential credit losses. Accounts receivable are deemed past due in accordance with the contractual terms of the agreement. Accounts are charged againstthe allowance for doubtful accounts once collection efforts are unsuccessful. Historically, such losses have been within management's expectations. Single source suppliers presently provide the Company with several components. In most cases, if a supplier were unable to deliver thesecomponents, the Company believes that it would be able to find other sources for these components subject to any regulatory qualifications, if required.Inventories Inventories are stated at the lower of cost (on a first-in, first-out basis) or market value. Excess and obsolete inventories are written down based onhistorical sales and forecasted demand, as judged by management. The Company determines inventory and product costs, which include allocatedproduction overheads, through use of standard costs.Revenue Recognition In the first quarter of fiscal 2011, the Company adopted Accounting Standards Update ("ASU") 2009-13, Multiple-Deliverable RevenueArrangements, and ASU 2009-14, Certain Arrangements That Include Software Elements. The new standard changes the requirements for establishingseparate units of accounting in a multiple element arrangement and requires the allocation of arrangement consideration to each deliverable to be basedon the relative selling price. The FASB also amended the accounting standards for revenue recognition to exclude software that is contained in a tangibleproduct from the scope of software revenue guidance if the software is essential to the tangible product's functionality. The Company adopted these newstandards on a prospective basis. For revenue arrangements that were entered into or materially modified after the adoption of these standards,implementation of this new authoritative guidance had an insignificant impact on the Company's reported net revenue since the first quarter of fiscal2011 as compared to net revenue if the related104Table of ContentsAccuray IncorporatedNotes to Consolidated Financial Statements (Continued)2. Summary of Significant Accounting Policies (Continued)arrangements entered into or modified after the effective date were subject to the accounting requirements in effect in the prior year. The Company frequently enters into sales arrangements with customers that contain multiple elements or deliverables. For revenue arrangementswith multiple elements which were entered into by June 30, 2010 and which have not subsequently been materially modified, the Company allocatesarrangement consideration to each element based upon vendor specific objective evidence ("VSOE") of fair value of the respective elements. VSOE offair value for each element is based upon the Company's standard rates charged for the product or service when such product or service is soldseparately or based upon the price established by the Company's pricing committee when that product or service is not yet being sold separately. Whencontracts contain multiple elements, and VSOE of fair value exists for all undelivered elements, the Company accounts for the delivered elements,principally the system and optional product upgrades, based upon the residual method. If VSOE of fair value does not exist for all the undeliveredelements, all revenue is deferred until the earlier of: (1) delivery of all elements, and (2) establishment of VSOE of fair value for all remainingundelivered elements. Under the new accounting guidance, in evaluating revenue recognition for arrangements which contain multiple deliverables, the Companydetermined that in certain instances it was not able to establish VSOE for all deliverables in an arrangement as the Company infrequently sells eachelement on a stand-alone basis, does not price products within a narrow range, or has a limited sales history. When VSOE cannot be established, theCompany attempts to establish the selling price of each element based on relevant third-party evidence ("TPE"). TPE is determined based oncompetitors' prices for similar deliverables when sold separately. Generally, the Company's offerings contain a significant level of proprietarytechnology, customization or differentiation such that the comparable pricing of products with similar functionality cannot be obtained. Furthermore, theCompany is unable to reliably determine what similar competitors' products' selling prices are on a stand-alone basis. Therefore, the Company typicallyis not able to determine TPE. When the Company is unable to establish selling price using VSOE or TPE, the Company uses its best estimate of selling price ("BESP") in theCompany's allocation of arrangement consideration. The objective of BESP is to determine the price at which the Company would transact a sale if theproduct or service were sold on a stand-alone basis. BESP is generally used for offerings that are not typically sold on a stand-alone basis or for new orhighly customized offerings. The Company determines BESP for a product or service by considering multiple factors including, but not limited to,pricing practices, internal costs, geographies and gross margin. The determination of BESP is made through consultation with and formal approval bythe Company's pricing committee, taking into consideration the overall go-to-market pricing strategy. As the Company's go-to-market strategies and other factors evolve, the Company may modify its pricing practices in the future, which could resultin changes in selling prices, including VSOE, TPE and BESP. As a result, the Company's future revenue recognition for multiple element arrangementscould differ materially from that recorded in the current period. The Company regularly reviews VSOE, TPE and BESP and maintains internal controlsover the establishment and update of these inputs. The Company has a limited number of software offerings which are not required to deliver the tangible product's essential functionality and can besold separately. Revenues from sales of these software products and related post-contract support will continue to be accounted for under software105Table of ContentsAccuray IncorporatedNotes to Consolidated Financial Statements (Continued)2. Summary of Significant Accounting Policies (Continued)revenue recognition rules. The Company's multiple-element arrangements may therefore have a software deliverable that is subject to the existingsoftware revenue recognition guidance. The revenue for these multiple-element arrangements is allocated to the software deliverable or group ofsoftware deliverables and the non-software deliverables based on the relative selling prices of all of the deliverables in the arrangement using thehierarchy in the new revenue recognition accounting guidance. The Company earns revenue from the sale of products, the operation of its shared ownership program, and the provision of related services, whichinclude installation services, post-contract customer support ("PCS"), training and other professional services. The Company records its revenues net ofany value added or sales tax. From time to time, the Company introduces customers to third party financing organizations. No amounts received fromthese third party financing organizations are at risk. The Company recognizes product revenues when there is persuasive evidence of an arrangement, the fee is fixed or determinable, collection of thefee is probable and delivery has occurred. Payments received in advance of product shipment are recorded as customer advances and are recognized asrevenue or deferred revenue upon product shipment or installation. The Company assesses the probability of collection based on a number of factors, including past transaction history with the customer and thecredit-worthiness of the customer. The Company generally does not request collateral from its customers. If the Company determines that collection isnot probable, the Company will defer the fee and recognize revenue upon receipt of cash. The Company records revenues from sales of systems to distributors on either a sell-through or sell-in basis, depending on the terms of thedistribution agreement as well as terms and conditions executed for each sale, and once all revenue recognition criteria have been met. For sales ofproduct upgrades and accessories to distributors, revenue is recognized on either a sell-through or sell-in basis, depending upon the terms of thepurchase order or signed quotation and once all revenue recognition criteria have been met. The Company's agreements with customers and distributors for system sales generally do not contain product return rights. Certain distributoragreements include parts inventory buy-back provisions upon distributorship termination. The Company accrues an inventory buy-back liability whenand if such distributorship termination is expected.Product Revenue The majority of our product revenue is generated from sales of the systems. The Company sells its systems with PCS contracts that provide forupgrades when and if they become available, training points and at times, professional services. The amount of arrangement fee allocated to products isdetermined by application of the relative selling price method for all elements in the arrangement for arrangements entered into or materially modified onor after July 1, 2010, or by using the residual method for arrangements entered into on or before June 30, 2010. If the Company is responsible forinstallation, the Company recognizes revenue only after installation and acceptance of the system. Otherwise, revenue is recognized upon delivery.106Table of ContentsAccuray IncorporatedNotes to Consolidated Financial Statements (Continued)2. Summary of Significant Accounting Policies (Continued)Service Revenue Our service revenue is generated primarily from warranty services, post warranty services, installation services, unspecified when and if availableproduct upgrades, training, and professional services. Warranty and post warranty service revenue is deferred and recognized ratably over the serviceperiod, generally one year, until no further obligation exists. Warranty service period starts upon product acceptance. Training and consulting servicerevenues that are not deemed essential to the functionality of the Systems are recognized as such services are performed. Installation service revenue isrecognized concurrent with system revenue. Costs associated with providing services are expensed when incurred, except when those costs are related to system upgrades where revenuerecognition has been deferred. In those cases, the costs are deferred and are recognized over the period of revenue recognition.Other revenue Other revenue primarily consists of research and development and construction contract revenues.Shared ownership program The Company also enters into arrangements under its shared ownership program with certain customers. Agreements under the shared ownershipprogram typically have a term of five years, during which the customer has the option to purchase the system, either at the end of the contractual periodor in advance, at the customer's request, at pre-determined prices. Under the terms of such program, the Company retains title to its system, while thecustomer has use of the product. The Company generally receives a minimum monthly payment and earns additional revenues from the customer basedupon its use of the product. The Company may provide unspecified upgrades to the product during the term of each program when and if available.Upfront non-refundable payments and minimum monthly payments from the customer are recognized as revenue over the contractual period. Additionalrevenues beyond the minimum payments from the shared ownership program are recorded as they become earned and receivable and are includedwithin shared ownership program revenues, which are included in products revenue in the consolidated statements of operations. Future minimum revenues under shared ownership arrangements as of June 30, 2011 are as follows (in thousands): Total usage-based fee revenues, which are included in products revenue, earned from the CyberKnife Systems under the shared ownershipprogram amounted to $1.5 million, $1.6 million and $3.2 million for the years ended June 30, 2011, 2010 and 2009, respectively.107Year Ending June 30, Amount 2012 $794 2013 734 2014 554 2015 554 2016 139 Total $2,775 Table of ContentsAccuray IncorporatedNotes to Consolidated Financial Statements (Continued)2. Summary of Significant Accounting Policies (Continued) Under the terms of the shared ownership program, the customer has the option to purchase the CyberKnife System at pre-determined prices basedon the period the system has been in use and considering the lease payments already received. Revenue from such sales is recorded in accordance withthe Company's revenue recognition policy, taking into account the PCS and any other elements that might be sold as part of the arrangement. AtJune 30, 2011, the Company had four systems installed under its shared ownership program. During the years ended June 30, 2011, 2010 and 2009,$3.6 million, nil and $3.2 million, respectively, of revenue was recognized in the consolidated statements of operations for the sale of one, nil and twoCyberKnife Systems, respectively, that were formerly under the shared ownership program. At June 30, 2011 and 2010, $0.5 million and nil,respectively, of amounts for extended warranty and training services related to these sold shared ownership units remained recorded as deferredrevenue, and will be recognized over the life of the extended warranty service period and as training service obligations are fulfilled. The CyberKnife Systems associated with the Company's shared ownership program are recorded within property and equipment. Depreciation andwarranty expenses attributable to the CyberKnife shared ownership systems are recorded within cost of products.Long-term construction and manufacturing contracts The Company recognizes revenue and cost of revenue related to long-term construction and manufacturing contracts using contract accounting onthe percentage-of-completion or the completed contract method. The Company recognizes such revenue under other revenue and cost of such revenueunder cost of other. Any loss provision identified from the total contract in the period is recorded as an increase to cost of revenue.Deferred Revenue and Deferred Cost of Revenue Deferred revenue consists of deferred product revenue, deferred shared ownership program revenue, deferred service revenue and deferred otherrevenue. Deferred product revenue arises from timing differences between the shipment of product and satisfaction of all revenue recognition criteriaconsistent with the Company's revenue recognition policy. Deferred shared ownership program revenue results from the receipt of advance paymentsthat will be recognized ratably over the term of the shared ownership program. Deferred service revenue results from the advance payment for servicesto be delivered over a period of time, usually one year. Service revenue is recognized ratably over the service period. Deferred cost of revenue consistsof the direct costs associated with the manufacturing of units, direct service costs for which the revenue has been deferred in accordance with theCompany's revenue recognition policies. Deferred revenue, and associated deferred cost of revenue, expected to be realized within one year areclassified as current liabilities and current assets, respectively.Customer Advances Customer advances represent payments made by customers in advance of product shipment.108Table of ContentsAccuray IncorporatedNotes to Consolidated Financial Statements (Continued)2. Summary of Significant Accounting Policies (Continued)Property and Equipment Property and equipment are stated at cost and are depreciated using the straight-line method over the estimated useful lives of the related assets.Leasehold improvements are depreciated on a straight-line basis over the remaining term of the lease or the estimated useful life of the asset, whicheveris shorter. Machinery and equipment are depreciated over five years. Furniture and fixtures are depreciated over four years. Computer and officeequipment and computer software are depreciated over three years. Repairs and maintenance costs, which are not considered improvements and do notextend the useful life of the property and equipment, are expensed as incurred.Software Capitalization Costs The Company capitalizes certain costs associated with obtaining or developing internal use software, including external direct costs of material andservices. Software development costs relating to assets to be sold in the normal course of business are included in research and development and areexpensed as incurred until technological feasibility is established. After technological feasibility is established, material software development costs arecapitalized. The capitalized cost is then amortized on a straight-line basis over the estimated product life, or on the ratio of current revenues to totalprojected product revenue, whichever is greater. To date, the period between achieving technological feasibility, which the Company has defined as theestablishment of a working model which typically occurs when the beta testing commences, and the general availability of such software has been shortand software development costs qualifying for capitalization have been insignificant. Capitalized software costs are included in property, plant and equipment and amortized beginning when the software project is complete and theassets is ready for its intended use. The Company has capitalized software development costs relating to internal use software as identified anddiscussed below at "Note 5. Balance Sheet Components."Impairment of Long-Lived Assets The Company reviews long-lived assets, including property and equipment, for impairment whenever events or changes in business circumstancesindicate that the carrying amount of the assets may not be fully recoverable using pretax undiscounted cash flows. Impairment, if any, is measured as theamount by which the carrying value of a long-lived asset exceeds its fair value. Through June 30, 2011, there have been no such impairment losses.Goodwill and Acquired Intangible Assets Goodwill represents the excess of acquisition cost over the fair value of tangible and identified intangible net assets of businesses acquired.Goodwill is not amortized, but is evaluated for impairment on an annual basis or when impairment indicators are present. In the first step of the analysis,the Company's assets and liabilities, including existing goodwill and other intangible assets, are assigned to the identified reporting units to determinethe carrying value of the reporting units. If the carrying value of the reporting unit is in excess of its fair value, an impairment may exist, and theCompany must perform the second step of the analysis, in which the implied fair value of the goodwill is compared to its carrying value to determine theimpairment charge, if any.109Table of ContentsAccuray IncorporatedNotes to Consolidated Financial Statements (Continued)2. Summary of Significant Accounting Policies (Continued) The fair value of the reporting unit is determined using the market approach. Under the market approach, the Company estimates the fair value ofeach reporting unit based on the Company's closing stock price on the trading day closest to the annual review date multiplied by the outstanding shareson that date. If the estimated fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, goodwill is not impairedand no further analysis is required. Through June 30, 2011, there have been no such impairment losses. Purchased intangible assets other thangoodwill, including developed technology, in-process research and development and backlog, are amortized on a straight-line basis over their estimateduseful lives unless their lives are determined to be indefinite. Purchased intangible assets are carried at cost, less accumulated amortization. Amortizationis computed over the estimated useful lives of the respective assets which range from approximately one to seven years.Business Combinations In fiscal 2011, the Company applied ASC 805, Business Combinations, and accounted for the acquisition of TomoTherapy using the acquisitionmethod of accounting. The underlying principles are similar to the previous guidance and require that the Company recognize separately from goodwillthe assets acquired and the liabilities assumed, generally at their acquisition date fair values. Goodwill as of the acquisition date is measured as theexcess of consideration transferred and the net of the acquisition date fair values of the assets acquired and the liabilities assumed. While the Companyuses its best estimates and assumptions as a part of the purchase price allocation process to accurately value assets acquired and liabilities assumed at theacquisition date, its estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to oneyear from the acquisition date, the Company may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset togoodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichevercomes first, any subsequent adjustments, if any, are recorded to the Company's consolidated statements of operations. Transaction costs and costs torestructure the acquired company are expensed as incurred. The operating results of the acquired company are reflected in the Company's consolidatedfinancial statements after the date of the merger or acquisition.Shipping and Handling The Company's billings for shipping and handling for product shipments to customers are included in product revenue. Shipping and handlingcosts incurred for inventory purchases are also included in cost of products.Advertising Expenses The Company expenses the costs of advertising and promoting its products and services as incurred. Advertising expenses were approximately$0.4 million, $0.4 million and $1.8 million for the years ended June 30, 2011, 2010 and 2009, respectively.Research and Development Costs Costs related to research, design and development of products are charged to research and development expense as incurred. These costs includedirect salaries, benefits, and other headcount110Table of ContentsAccuray IncorporatedNotes to Consolidated Financial Statements (Continued)2. Summary of Significant Accounting Policies (Continued)related costs for research and development personnel; costs for materials used in research and development activities; costs for outside services andallocated portions of facilities and other corporate costs. The Company has entered into research and clinical study arrangements with selected hospitals,cancer treatment centers, academic institutions and research institutions worldwide. These agreements support the Company's internal research anddevelopment capabilities. The Company has also entered into an Agreement with Siemens for research and development work. Payments earned andreceived from Siemens will be recorded as contra research and development costs. See "Note 3. Collaboration Agreement" for additional information.Share-Based Compensation The Company accounts for share-based compensation by measuring and recognizing the fair value of all share-based payment awards made toemployees based on the estimated grant date fair values, including employee stock options, restricted stock units ("RSUs"), restricted stock awards(RSAs") and the employee stock based purchase plan. The determination of fair value involves a number of significant estimates. The Company usesthe Black-Scholes option pricing model to estimate the value of employee stock options which requires a number of assumptions to determine the modelinputs. These include the expected volatility of the Company's stock, the expected term of the share-based award, the expected risk free rate of interestand dividend yields. As share-based compensation expense is based on awards ultimately expected to vest, the expense is recorded net of estimatedforfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.As the Company has been operating as a public company for a period of time that is shorter than its estimated expected option term, the Companyconcluded that its historical price volatility does not provide a reasonable basis for input assumptions within its Black-Scholes valuation model whendetermining the fair value of its stock options. Expected volatility was based on the historical volatility of a peer group of publicly traded companies.The Company continues to use the "simplified" method for the estimated term of the awards. Management's estimate of forfeitures is based on historicalexperience but actual forfeitures could differ materially as a result of voluntary employee actions which could result in a significant change in futureshare-based compensation expense. See "Note 9. Stockholder's Equity" for additional information.Net Income (Loss) Per Common Share Basic net income (loss) per share is computed by dividing net income (loss) by the weighted- average number of common shares outstandingduring the period. Diluted net income (loss) per share is computed by dividing net income (loss) by the weighted average number of common sharesoutstanding and other dilutive common shares outstanding during the period. The potential dilutive shares of the Company's common stock resultingfrom the assumed exercise of outstanding stock options, vesting of RSUs and RSAs and ESPP shares to be purchased are determined under thetreasury stock method. For the fiscal year ended June 30, 2011, all potential dilutive common share equivalents were excluded from the calculation of net loss per share astheir inclusion would have been anti-dilutive. Potential dilutive common share equivalents were comprised of outstanding options of 8,336,720,restricted stock units of 658,193 and restricted stock awards of 190,522 for the year ended June 30, 2011. For the years ended June 30, 2010 and 2009,outstanding options of 4,056,934 and 3,504,979,111Table of ContentsAccuray IncorporatedNotes to Consolidated Financial Statements (Continued)2. Summary of Significant Accounting Policies (Continued)respectively, and restricted stock units of 259,789 and 552,120, respectively, were excluded from the calculation of diluted net income per share as theirinclusion would be anti-dilutive. The following table sets forth the basic and diluted per share computations (in thousands, except per share amounts):Income Taxes The Company is required to estimate its income taxes in each of the tax jurisdictions in which it operates prior to the completion and filing of taxreturns for such periods. This process involves estimating actual current tax expense together with assessing temporary differences in the treatment ofitems for tax purposes versus financial accounting purposes that may create net deferred tax assets and liabilities. The Company accounts for incometaxes under the asset and liability method, which requires, among other things, that deferred income taxes be provided for temporary differencesbetween the tax bases of the Company's assets and liabilities and their financial statement reported amounts. In addition, deferred tax assets are recordedfor the future benefit of utilizing net operating losses, research and development credit carryforwards and temporary differences. The Company records a valuation allowance to reduce its deferred tax assets to the amount the Company believes is more likely than not to berealized. Because of the uncertainty of the realization of the deferred tax assets, the Company has recorded a full valuation allowance against its domesticnet deferred tax assets. The calculation of unrecognized tax benefits involves dealing with uncertainties in the application of complex global tax regulations. Managementregularly assesses the Company's tax positions in light of legislative, bilateral tax treaty, regulatory and judicial developments in the countries in whichthe Company does business. Management does not believe there will be any material changes in the unrecognized tax benefits within the next12 months.Comprehensive Income (Loss) Comprehensive income (loss) is comprised of net income (loss) and other comprehensive income (loss). Other comprehensive income (loss)consists of foreign currency translation adjustments and unrealized gains and losses on investments that have been excluded from the determination ofnet112 Years Ended June 30, 2011 2010 2009 Numerator: Net income (loss) attributable to stockholders $(26,682)$2,841 $609 Denominator: Basic weighted-average shares outstanding 60,085 57,560 55,413 Stock options and restricted stock units — 2,631 3,316 Diluted weighted-average shares of common stock outstanding 60,085 60,191 58,729 Basic net income (loss) per share $(0.44)$0.05 $0.01 Diluted net income (loss) per share $(0.44)$0.05 $0.01 Table of ContentsAccuray IncorporatedNotes to Consolidated Financial Statements (Continued)2. Summary of Significant Accounting Policies (Continued)income (loss). The Company has reported the components of comprehensive income (loss) for the years ended June 30, 2011, 2010 and 2009 in itsconsolidated statement of stockholders' equity.Segment Information The Company has determined that it operates in only one segment as it only reports profit and loss information on an aggregate basis to its chiefoperating decision maker. The Company's long-lived assets maintained outside the United States are not material. Revenue by geographic region is based on the shipping addresses of the Company's customers. The following summarizes revenue by geographicregion (in thousands):Recent Accounting Pronouncements In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220)—Presentation of Comprehensive Income (ASU 2011-05), to require an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensiveincome either in a single continuous statement of comprehensive income or in two separate but consecutive statements. ASU 2011-05 eliminates theoption to present the components of other comprehensive income as part of the statement of equity. ASU 2011-05 is effective for the Company in thefirst quarter of fiscal year 2013 and should be applied retrospectively. The Company is currently evaluating the impact of its pending adoption of ASU2011-05 on its consolidated financial statements. In December 2010, the FASB issued an amendment to the disclosure requirements for business combinations. This amendment clarifies that if apublic entity is required to disclose pro forma information for business combinations, the entity should disclose such pro forma information as thoughthe business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only.This amendment also expands the supplemental pro forma disclosures for business combinations to include a description of the nature and amount ofmaterial nonrecurring pro forma adjustments directly attributable to the business combination included in reported pro forma revenue and earnings. TheCompany is required to adopt this amendment on July 1, 2011, the first day of Fiscal 2012 for any business combinations that are material on anindividual or aggregate basis. In December 2010, the FASB issued an amendment to the accounting requirements for goodwill and other intangibles. This amendment modifiesStep 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required toperform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likelythan not that a goodwill impairment exists, an entity should113 Years Ended June 30, 2011 2010 2009 United States (including Puerto Rico) $122,635 $147,381 $171,563 Europe 67,244 58,049 30,874 Asia (excluding Japan) 16,159 5,608 19,848 Japan 16,246 10,587 11,313 Total $222,284 $221,625 $233,598 Table of ContentsAccuray IncorporatedNotes to Consolidated Financial Statements (Continued)2. Summary of Significant Accounting Policies (Continued)consider whether there are any adverse qualitative factors indicating that impairment may exist. The Company is required to adopt this amendment onJuly 1, 2011, the first day of Fiscal 2012, and this adoption is not expected to have a material impact on the Company's financial statements.3. Alliance Agreement In June 2010, the Company entered into a Strategic Alliance Agreement with Siemens AG, or the Alliance Agreement, pursuant to which (1) theCompany granted Siemens certain distribution rights to its CyberKnife Systems, (2) Siemens agreed to incorporate certain Accuray technology intocertain of its linac products, the combined products being known as the Cayman Products, and (3) the Company created a research and developmentrelationship between Accuray and Siemens for the pursuit and implementation of other potential collaboration opportunities in the future. Siemens' rightto distribute the CyberKnife System under this agreement remains unchanged, though sales activity to date under the Agreement has not been material.The Company believes that as a result of its acquisition of TomoTherapy, the elements of the Agreement described in sections (2) and (3) above areunlikely to develop further. Under the Alliance Agreement, both Siemens and the Company had the right to terminate the Alliance Agreement on writtennotice within 60 days following the acquisition of or by either party by specified competitors. On August 3, 2011, the Company entered into anAmendment to the Agreement with Siemens, which provides that each of the Company's and Siemens' right to terminate the Agreement as a result ofthe acquisition of TomoTherapy by the Company is extended until December 31, 2011 in order to allow the Company and Siemens to evaluate theimpact of the TomoTherapy acquisition on the arrangements created by the Agreement. There can be no assurance that the strategic alliance withSiemens AG will be successful or that the economic terms of the Alliance Agreement will ultimately prove to be favorable to the Company or thatSiemens will not terminate the Alliance Agreement as a result of the Company's acquisition of TomoTherapy.4. Financial Instruments The Company is permitted to measure many financial instruments and certain other items at fair value, with changes in fair value recognized inearnings each reporting period. The election, called the fair value option, enables entities to achieve an offset accounting effect for changes in fair valueof certain related assets and liabilities without having to apply complex hedge accounting provisions. In November 2008, the Company had entered into an agreement ("Rights Agreement") with UBS, which provided the Company with ARS("Auction Rate Security") Rights ("Rights") to sell its ARS at par value to UBS at any time during the period June 30, 2010 through July 2, 2012. The Company elected fair value accounting for the put option recorded in connection with the Rights Agreement. This election was made in orderto mitigate volatility in earnings caused by accounting for the purchased put option and underlying ARS under different methods. The initial election offair value resulted in a gain included in other income, net for the put option. During the year ended June 30, 2010, the Company recorded a total unrealized loss of $1.0 million for a total fair value of the put option of$0.4 million as of June 30, 2010. During the year ended June 30, 2010, $1.2 million of unrealized gain in fair value of the ARS resulted in a netunrealized gain of $0.3 million to other income, net. During the year ended June 30, 2010, UBS redeemed $0.4 million of the ARS, which generatedrealized gains that were not material. No activity related to the fair value114Table of ContentsAccuray IncorporatedNotes to Consolidated Financial Statements (Continued)4. Financial Instruments (Continued)of the put option is included in the Company's consolidated statement of operations for the year ended June 30, 2011 due to the liquidation at par valueof the underlying ARS securities as of June 30, 2010. The Company defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal ormost advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The fair valuehierarchy contains three levels of inputs that may be used to measure fair value, as follows: Level 1— Unadjusted quoted prices that are available in active markets for the identical assets or liabilities at the measurement date. Level 2— Other observable inputs available at the measurement date, other than quoted prices included in Level 1, either directly orindirectly, including:•Quoted prices for similar assets or liabilities in active markets; •Quoted prices for identical or similar assets in non-active markets; •Inputs other than quoted prices that are observable for the asset or liability; and •Inputs that are derived principally from or corroborated by other observable market data. Level 3— Unobservable inputs that cannot be corroborated by observable market data and reflect the use of significant managementjudgment. These values are generally determined using pricing models for which the assumptions utilize management's estimates of marketparticipant assumptions. At June 30, 2011, the Company had approximately $19,000 invested in money market funds, which were measured using Level 1 inputs and areclassified as cash equivalents. The following table sets forth by level within the fair value hierarchy the Company's financial assets that were accounted for at fair value on arecurring basis at June 30, 2010, according to the valuation techniques the Company used to determine their fair values (in thousands):115 Fair ValueMeasurements UsingInputs Considered as Fair Value atJune 30, 2010 Level 1 Level 2 Money market funds $1,104 $1,104 $— Corporate notes 34,992 — 34,992 Commercial paper 22,513 — 22,513 U.S. government agency securities 43,774 — 43,774 Total $102,383 $1,104 $101,279 Table of ContentsAccuray IncorporatedNotes to Consolidated Financial Statements (Continued)4. Financial Instruments (Continued) Investments in marketable securities classified as available-for-sale by security type at June 30, 2010, consisted of the following (in thousands): The table below presents a reconciliation of all assets and liabilities measured at fair value on a recurring basis using significant unobservableinputs (Level 3). The Company classifies financial instruments in Level 3 of the fair value hierarchy when there is reliance on at least one significantunobservable input to the valuation model. In addition to these unobservable inputs, the valuation models for Level 3 financial instruments typically alsorely on a number of inputs that are readily observable either directly or indirectly. Thus, the gains and losses presented in the table below includechanges in the fair value related to both observable and unobservable inputs (in thousands): The following methods and assumptions were used to estimate the fair value of each class of financial instrument: Money market funds. Money market funds are open-ended mutual funds that typically invest in short-term debt securities. Money market fundsare classified as cash and cash equivalents on the Company's consolidated balance sheets. The Company classified these funds that are specificallybacked by debt securities as Level 1 instruments due to its usage of unadjusted quoted prices that are available in active markets for the identical assetsor liabilities at the measurement date. Corporate notes. Corporate notes are floating-rate obligations that are payable on demand. These are classified as available-for-sale within short-term marketable securities on the Company's consolidated balance sheets. The market approach was used to value the Company's variable-rate demandnotes. The Company classified these securities as Level 2 instruments due to either its usage of observable market prices in less active markets or, whenobservable market prices were not available, its use of non-binding market prices that are corroborated by observable market data or quoted marketprices for similar instruments.116 June 30, 2010 Amortized Cost Gross UnrealizedGains Gross UnrealizedLosses Fair Value Short-term investments: Commercial paper $21,126 $— $(11)$21,115 Corporate notes 34,957 64 (29) 34,992 U.S. government agency securities 43,761 15 (2) 43,774 Total short-term investments $99,844 $79 $(42)$99,881 Year EndedJune 30, 2010 Beginning balance $22,007 Unrealized gain on auction rate securities included in earnings 1,656 Unrealized loss on put option included in earnings (1,338) Redemption of auction rate securities (22,325) Ending balance $— Table of ContentsAccuray IncorporatedNotes to Consolidated Financial Statements (Continued)4. Financial Instruments (Continued) Commercial paper. Commercial paper is an unsecured, short-term debt instrument issued by corporations and financial institutions that generallymature within 270 days. The Company did not hold any commercial paper as of June 30, 2011. The total fair value of commercial paper held as ofJune 30, 2010 of $22.5 million included $1.4 million of money market funds invested in commercial paper, which is classified as cash equivalents. Theportion in cash and cash equivalents represents highly liquid debt instruments with insignificant interest rate risk and maturities of ninety days or less atthe time of purchase. The market approach was used to value the Company's commercial paper. The Company classified these securities as Level 2instruments due to either its usage of observable market prices in less active markets or, when observable market prices were not available, its use ofnon-binding market prices that are corroborated by observable market data or quoted market prices for similar instruments. U.S. government agency securities. U.S. government agency securities are issued by U.S. Federal, state and local governments, government-sponsored enterprises, and governmental entities such as authorities or special districts that generally mature within two years. These are classified asshort-term marketable securities on the Company's consolidated balance sheets. The market approach was used to value the Company's U.S.government agency securities. The Company classified these securities as Level 2 instruments due to either its usage of observable market prices in lessactive markets or, when observable market prices were not available, its use of non-binding market prices that are corroborated by observable marketdata or quoted market prices for similar instruments.5. Balance Sheet ComponentsAccounts Receivable, net Accounts receivable, net consisted of the following (in thousands):Inventories Inventories consisted of the following (in thousands):117 June 30, 2011 2010 Accounts receivable $59,858 $37,861 Unbilled fees and services 2,319 209 62,177 38,070 Less: Allowance for doubtful accounts (324) (115) Accounts receivable, net $61,853 $37,955 June 30, 2011 2010 Raw materials $60,309 $16,109 Work-in-process 10,002 2,491 Finished goods 27,525 9,586 Total inventories $97,836 $28,186 Table of ContentsAccuray IncorporatedNotes to Consolidated Financial Statements (Continued)5. Balance Sheet Components (Continued)Property and Equipment, net Property and equipment consisted of the following (in thousands): Depreciation and amortization expense related to property and equipment for the years ended June 30, 2011, 2010, and 2009 was $6.3 million,$7.1 million and $6.4 million, respectively. Accumulated depreciation related to the CyberKnife Systems attributable to the shared ownership program atJune 30, 2011 and 2010 was $2.1 million and $1.8 million, respectively. During fiscal 2011, the Company implemented a new enterprise resource planning information system that cost $3.8 million. The costs wereprimarily related to license and consulting fees and were previously capitalized in construction in progress.6. Investment On July 29, 2008, the Company and Morphormics entered into a Stock Purchase Agreement pursuant to which the Company agreed to purchase120,000 shares of Morphormics Series C Preferred Stock at $12.50 per share, for a total purchase price of $1.5 million. In exchange, Morphormicsgranted the Company a non-exclusive worldwide license to integrate several of its software products into the Company's treatment planning software.The equity investment afforded the Company a voting interest of approximately 18% in Morphormics. The Company's equity was considered to be atrisk and was deemed not sufficient to finance Morphormics' current product development activities without additional subordinated financial support. Inaddition, the Company was deemed to be Morphormics' primary beneficiary; therefore, it would absorb a majority of expected losses. The Companyconsolidated Morphormics in its financial results. The consolidation of Morphormics' assets and liabilities did not have a material effect on theCompany's consolidated balance sheet at June 30, 2010. The Company recorded losses in fiscal years 2010 and 2009 of $0.5 million and $0.9 million,respectively. No additional investments were made by the Company, and as of June 30, 2010, the investment amount had been substantially utilized byMorphormics. Effective July 1, 2010, the determination of primary beneficiary status has changed from a quantitative approach to a qualitative approach underwhich the Company is no longer considered the primary beneficiary of Morphormics. Accordingly, the Company has deconsolidated Morphormics'118 June 30, 2011 2010 Furniture and fixtures $5,317 $3,628 Computer and office equipment 8,280 5,627 Software 8,107 2,670 Leasehold improvements 15,386 7,771 Machinery and equipment 33,692 15,291 CyberKnife shared ownership systems 4,923 5,216 Construction in progress 602 1,927 76,307 42,130 Less: Accumulated depreciation and amortization (31,484) (27,446) Property and equipment, net $44,823 $14,684 Table of ContentsAccuray IncorporatedNotes to Consolidated Financial Statements (Continued)6. Investment (Continued)assets and liabilities from its consolidated balance sheet as of July 1, 2010. The deconsolidation of the Company's investment in Morphormics resultedin a net cumulative-effect adjustment to accumulated deficit of $27,000 on the Company's consolidated balance sheet. The Company determined that the fair value of the investment was zero as of July 1, 2010 using an income approach. The assumptions for thevaluation included historical financial data, operating projections, estimated future cash flows and an adjustment for lack of liquidity.7. Goodwill and Intangible AssetsGoodwill Goodwill as of June 30, 2011 and 2010 and changes in the carrying amount of goodwill for the respective periods are as follows (in thousands):Intangible Assets The Company's intangible assets associated with completed acquisitions at June 30, 2011 and 2010 are as follows: (in thousands): During the year ended June 30, 2011, the Company recorded additions to intangible assets of $66.8 million related to the acquisition ofTomoTherapy. See "Note 12, Acquisition," for additional information on the acquisition of TomoTherapy. Amortization expense related to intangibleassets was $1.2 million and $0.3 million for the years ended June 30, 2011 and 2010, respectively. During the years ended June 30, 2011 and 2010, theCompany did not record any impairment charges as a result of its analysis of its intangible assets.119 June 30, 2011 2010 Balance at beginning of period $4,495 $4,495 Goodwill resulting from acquisition of TomoTherapy (Note 12) 49,979 — Balance at end of period $54,474 $4,495 June 30, 2011 June 30, 2010 UsefulLives GrossCarryingAmount AccumulatedAmortization NetAmount GrossCarryingAmount AccumulatedAmortization NetAmount (in years) Developedtechnology 6.0 $43,455 $(2,069)$41,386 $1,810 $(1,422)$388 Backlog 1.25 10,500 (467) 10,033 — — — Distributorlicense 2.5 1,860 (40) 1,820 — — — In-processresearch anddevelopment(CPAC) Indefinite 12,800 — 12,800 — — — $68,615 $(2,576)$66,039 $1,810 $(1,422)$388 Table of ContentsAccuray IncorporatedNotes to Consolidated Financial Statements (Continued)7. Goodwill and Intangible Assets (Continued) The estimated future amortization expense of purchased intangible assets, excluding in-process research and development, as of June 30, 2011, isas follows (in thousands):8. Commitments and ContingenciesOperating Lease Agreements The Company leases office and manufacturing space under non-cancelable operating leases with various expiration dates through December 2018.Rent expense, including common area maintenance, was $4.8 million, $5.2 million and $6.0 million for the years ended June 30, 2011, 2010 and 2009,respectively. The terms of the facility leases provide for rental payments on a graduated scale. The Company recognizes rent expense on a straight-linebasis over the lease period, and has accrued for rent expense incurred but not paid. Future minimum lease payments under non-cancelable operating lease agreements as of June 30, 2011 are as follows (in thousands): The Company enters into standard indemnification agreements with its landlords and all superior mortgagees and their respective directors,officers' agents, and employees in the ordinary course of business. Pursuant to these agreements, the Company will indemnify, hold harmless, and agreeto reimburse the indemnified party for losses suffered or incurred by the indemnified party, generally the landlords, in connection with any loss,accident, injury, or damage by any third party with respect to the leased facilities. The term of these indemnification agreements is from thecommencement of the lease agreements until termination of the lease agreements. The maximum potential amount of future payments the Companycould be required to make under these indemnification agreements is unlimited; however, historically the Company has not incurred claims or costs todefend lawsuits or settle claims related to these indemnification agreements. The Company has recorded no liability120Year Ending June 30, Amount 2012 $16,220 2013 9,306 2014 7,298 2015 6,933 2016 6,934 Thereafter 6,548 $53,239 Year Ending June 30, Amount 2012 $7,076 2013 6,331 2014 5,953 2015 3,758 2016 1,762 Thereafter 3,948 Total $28,828 Table of ContentsAccuray IncorporatedNotes to Consolidated Financial Statements (Continued)8. Commitments and Contingencies (Continued)associated with its indemnification agreements as it is not aware of any pending or threatened actions that represent probable losses as of June 30, 2011.Royalty Agreements In March 2007, the Company entered into a license and royalty agreement with Deutsches Krebsforschungszentrum ("DKFZ"), a German cancerresearch center. Under this agreement, the Company has a non-exclusive license to use certain technology. The Company is obligated to pay DKFZ$12,500 for each CyberKnife System sold that includes the licensed technology, with the stipulation that the Company must make minimum annualpayments of $50,000. Royalty expense under this agreement recorded in cost of revenue or deferred cost of revenue was $0.6 million, $0.6 million and$0.5 million for the years ended June 30, 2011, 2010 and 2009, respectively. At June 30, 2011 and 2010, the Company accrued approximately$0.3 million under this agreement and the amounts are included in other accrued liabilities in the accompanying consolidated balance sheets. The Company, as result of the acquisition of TomoTherapy, has an exclusive license agreement with the Wisconsin Alumni Research Foundation(WARF), a shareholder of the Company, to make, use, sell and otherwise distribute products under certain of WARF's patents anywhere in the world.The Company is required to pay WARF a royalty for each product sold. The license agreement expires upon expiration of the patents and may beterminated earlier if the Company so elects. The Company may also grant sublicenses to third parties but must pay WARF 50% of all fees, royalties andother payments received. WARF has the right to terminate the license agreement if the Company does not meet the minimum royalty obligations, whichare $0.3 million per year, or if the Company commits any breach of the license agreement's covenants. If the Company were to lose this license, it wouldbe unable to produce or sell the TomoTherapy Systems.Contingencies From time to time, the Company may become involved in litigation relating to claims arising during the ordinary course of business. Managementdoes not believe the final disposition of these matters will have a material adverse effect on the financial position, results of operations or future cashflows of the Company.Software License Indemnity Under the terms of the Company's software license agreements with its customers, the Company agrees that in the event the software soldinfringes upon any patent, copyright, trademark, or any other proprietary right of a third party, it will indemnify its customer licensees against any loss,expense, or liability from any damages that may be awarded against its customer. The Company includes this infringement indemnification in all of itssoftware license agreements and selected managed services arrangements. In the event the customer cannot use the software or service due toinfringement and the Company cannot obtain the right to use, replace or modify the license or service in a commercially feasible manner so that it nolonger infringes, then the Company may terminate the license and provide the customer a refund of the fees paid by the customer for the infringinglicense or service. The Company has recorded no liability associated with this indemnification, as it is not aware of any pending or threatened actionsthat represent probable losses as of June 30, 2011.121Table of ContentsAccuray IncorporatedNotes to Consolidated Financial Statements (Continued)8. Commitments and Contingencies (Continued)LitigationAccuray Securities Litigation On July 22, 2009, a securities class action lawsuit was filed in the U.S. District Court for the Northern District of California against the Companyand certain of its current and former directors and officers. On August 7, 2009 and August 9, 2009, two securities class action complaints, both similarto the one filed on July 22, 2009, were filed against the same defendants in the same court. These three actions were consolidated. The consolidatedcomplaint generally alleges that the Company and the individual defendants made false or misleading public statements regarding its operations and seekunspecified monetary damages and other relief. On August 31, 2010, the Court granted defendants' motion to dismiss the consolidated complaint andgranted plaintiffs leave to file an amended complaint. On September 27, 2010, plaintiffs filed an amended complaint. The amended complaint names theCompany and certain of its current and former officers and directors as defendants and generally alleges that the defendants made false or misleadingpublic statements regarding its operations. The amended complaint seeks unspecified monetary damages and other relief. Defendants filed a motion todismiss the amended complaint. On April 28, 2011, the parties filed a stipulation of settlement with the court, providing for the settlement of thelitigation for a payment of $13.5 million which will be covered by insurance. The court preliminarily approved the settlement on June 10, 2011. Ahearing on the terms of the settlement was held on September 1, 2011. A final judgment is expected in November of this year.Stockholder Derivative Actions On August 5, 2009, a shareholder derivative lawsuit was filed in Santa Clara County Superior Court against certain of the Company's current andformer officers and directors. The Company is named as a nominal defendant. The complaint generally alleges that the defendants breached theirfiduciary duties by misrepresenting and/or failing to disclose material information regarding its business and financial performance, and seeksunspecified monetary damages and other relief. On February 25, 2010, the plaintiff dismissed the action without prejudice. On November 24, 2009, a shareholder derivative lawsuit was filed in the U.S. District Court for the Northern District of California against certainof the Company's current and former officers and directors. The Company is named as a nominal defendant. Three other shareholder derivative lawsuitswere filed in the same court on November 30, 2009, December 1, 2009 and March 16, 2010. These actions have been consolidated. The amendedconsolidated complaint generally alleges that the defendants breached their fiduciary duties by misrepresenting and/or failing to disclose materialinformation regarding its business and financial performance, and that certain defendants also violated federal and California securities laws. Theamended consolidated complaint seeks unspecified monetary damages and other relief. On August 31, 2010, the Court granted defendants' motion todismiss, with leave to amend. On September 27, 2010, plaintiffs filed a notice of their intent not to file an amended complaint. On October 6, 2010,judgment was entered and the action dismissed. Plaintiffs filed a notice of appeal to the U.S. Court of Appeals for the Ninth Circuit on November 8,2010. On March 15, 2011, the parties filed a joint motion to voluntarily dismiss the appeal without prejudice and to remand the action to the districtcourt for consideration of the settlement. On March 16, 2011, the parties filed their Stipulation of Settlement and plaintiffs filed an unopposed motionfor approval of the settlement. A hearing on final approval of the settlement was held on May 5, 2011. The court approved the122Table of ContentsAccuray IncorporatedNotes to Consolidated Financial Statements (Continued)8. Commitments and Contingencies (Continued)settlement for a payment of $0.8 million, which was fully covered by insurance, and entered final judgment on May 6, 2011. On February 14, 2011, a purported shareholder filed a complaint in Santa Clara County Superior Court naming as defendants certain of theCompany's current and former officers and directors. The Company is named as a nominal defendant. The complaint generally copied the allegations ofthe federal derivative action and also alleged that a litigation demand concerning such allegations was wrongfully denied. On March 24, 2011, theplaintiff filed an amended complaint. On April 28, 2011, the Company and a number of individual defendants filed demurrers to the amended complaint.On June 23, 2011, the court entered a stipulation and proposed order dismissing the case with prejudice.Litigation relating to the TomoTherapy Acquisition On March 11, 2011, a purported class action complaint was filed in the Circuit Court for the State of Wisconsin, Dane County, on behalf of aputative class of TomoTherapy shareholders and naming as defendants TomoTherapy and TomoTherapy's board of directors (prior to the acquisition ofTomoTherapy by the Company). Thereafter, four additional complaints were filed in the same court on behalf of the same class and against the samedefendants, and two such complaints also named the Company and Jaguar Acquisition, Inc., a wholly-owned subsidiary of the Company ("MergerSub"). On April 4, 2011, all five actions were consolidated. The complaints generally allege that, in connection with the Company's then proposedmerger transaction with TomoTherapy, TomoTherapy's board breached their fiduciary duties by, among other things, failing to maximize the value ofTomoTherapy to its shareholders and purportedly agreeing to certain terms in the merger agreement, which are allegedly preclusive and onerous. Thecomplaints further allege that the Company and Merger Sub aided and abetted TomoTherapy's board of directors in their alleged breaches of fiduciaryduties. The plaintiffs seek, among other things, an injunction barring consummation of the merger, rescission or recessionary damages, costs andattorneys' fees. The Company and Merger Sub were dismissed from the litigation without prejudice on April 19, 2011. The consolidated complaintagainst TomoTherapy and the former directors of TomoTherapy was dismissed with prejudice and without costs to either party on July 5, 2011.Best Medical Trade Secret Litigation On September 3, 2009, Best Medical International, Inc. ("Best Medical") filed a lawsuit against the Company in the U.S. District Court for theWestern District of Pennsylvania, claiming it induced certain individuals to leave the employment of Best Medical and join the Company in order to gainaccess to Best Medical's confidential information and trade secrets. The Company filed a motion for summary judgment on May 20, 2011, and BestMedical filed its response on June 21, 2011 and filed a response to their response on July 8, 2011. The Company is now awaiting a ruling by the court.Best Medical is seeking monetary damages and other relief. At this time, the Company does not have enough information to estimate what, if any,financial impact this claim will have.Best Medical Patent Litigation On August 6, 2010, Best Medical filed an additional lawsuit against the Company in the U.S. District Court for the Western District ofPennsylvania, claiming it has infringed U.S. Patent No. 5,596,619, a patent that Best Medical alleges protects a method and apparatus for conformal123Table of ContentsAccuray IncorporatedNotes to Consolidated Financial Statements (Continued)8. Commitments and Contingencies (Continued)radiation therapy. On December 2, 2010, the Court granted the Company's motion to dismiss, with leave to amend. On December 16, 2010, BestMedical filed an amended complaint, claiming that the Company also infringed U.S. Patent Nos. 6,038,283 and 7,266,175, both of which Best Medicalalleges cover methods and apparatus for conformal radiation therapy. On March 9, 2011, the Court dismissed with prejudice all counts against theCompany, except for two counts of alleged willful infringement of two of the patents. The Court issued a Scheduling Order on May 12, 2011appointing a special master for claim construction, and setting a claim construction hearing on January 10, 2012. Best Medical moved to voluntarilydismiss one of the two remaining patent claims on June 28, 2011, which the court granted on June 30, 2011, leaving only one patent (U.S. PatentNo. 6,038,283) at issue in the case. On September 1, 2011, the Court modified its Scheduling Order, setting a claim construction hearing onJanuary 24-25, 2012. Best Medical is seeking declaratory and injunctive relief, as well as unspecified compensatory and treble damages and other relief.At this time, the Company does not have enough information to estimate what, if any, financial impact this claim will have.TomoTherapy Securities Litigation On May 30, 2008 and June 10, 2008, two separate complaints were filed by certain shareholders of TomoTherapy in the U.S. District Court forthe Western District of Wisconsin against TomoTherapy, certain of its officers and all of its independent directors during the period in question. Thecomplaints were consolidated on October 23, 2008. The consolidated complaint generally alleges that the defendants violated the Securities Act of 1933with respect to statements made in connection with the initial and secondary public offerings of the Company's common stock and the SecuritiesExchange Act of 1934 by misrepresenting the Company's projected financial outlook during the period May 9, 2007 through April 17, 2008. Thecomplaint seeks compensatory damages in an unspecified amount. TomoTherapy moved to dismiss the consolidated complaint on December 8, 2008.On July 9, 2009, the Court dismissed all but one claim for failure to state a claim upon which relief could be granted. On August 3, 2009, the plaintiffsfiled their Second Amended Consolidated Complaint. TomoTherapy filed a motion to dismiss on September 3, 2009, and on December 15, 2009, theCourt granted this second motion to dismiss in part and denied it in part. On July 28, 2010, TomoTherapy entered into a settlement agreement, whichwas approved by the court on March 18, 2011 after notification to purported class members. Under the settlement, the claims against TomoTherapy andits officers and directors were dismissed with prejudice and released in exchange for a cash payment of $5.0 million, which has been placed in escrow,and was funded by TomoTherapy's insurance carrier. A portion of this amount was the fee awarded to class counsel by the Court.TomoTherapy Stockholder Derivative Actions On May 28, 2010 and July 9, 2010, two separate derivative lawsuits were filed in the Circuit Court of Dane County in Madison, Wisconsin bycertain shareholders of TomoTherapy against TomoTherapy and certain officers and all of the persons who have served as directors of TomoTherapysince May 9, 2007. The complaints allege that all of the individual defendants breached their fiduciary duties and engaged in abuse of control, grossmismanagement and waste of corporate assets, and that certain of them were unjustly enriched. The complaints were consolidated on October 11, 2010.The allegations are substantially similar to those claims made in the TomoTherapy Securities Litigation describe above. The Complaints seek damages,equitable relief, restitution and disgorgement of profits, costs and disbursements of the action, and other relief the court deems proper. In March 2010,TomoTherapy124Table of ContentsAccuray IncorporatedNotes to Consolidated Financial Statements (Continued)8. Commitments and Contingencies (Continued)received two shareholder demand letters from attorneys representing other shareholders containing allegations substantially similar to those made in theforegoing complaints. On February 9, 2011, TomoTherapy entered into an agreement to settle all of the foregoing complaints and demand letters. Under the proposedsettlement, the claims against TomoTherapy and its officers and directors would be dismissed with prejudice and released in exchange forimplementation of a number of governance changes and the payment of $275,000 for attorneys fees, $250,000 of which would be funded byTomoTherapy's insurance carrier. On March 4, 2011, the court preliminarily approved the terms of the settlement, subject to notice to shareholders.Final approval was granted by the court in April 2011. As of June 30, 2011, TomoTherapy estimated that it would not incur any material costs inconnection with these claims or the defense thereof, given that TomoTherapy has already paid the applicable $0.5 million insurance deductible inconnection with the TomoTherapy Securities Litigation described above.TomoTherapy Former Distributor in Japan On July 17, 2009, Hi-Art Co., Ltd. (Hi-Art), TomoTherapy's former distributor in Japan, filed a complaint against TomoTherapy in the TokyoDistrict Court seeking compensation it claims is owed by TomoTherapy. The Company and Hi-Art entered into a settlement agreement pursuant towhich the Company has agreed to pay 190,000,000 yen (or approximately $2.3 million) and Hi-Art has dropped all claims against TomoTherapy andthe Company. This amount is included in accrued liabilities as of June 30, 2011. On July 26, 2011, the Court approved the settlement and issued adecree dismissing the case.Rotary Systems On April 28, 2011, a former supplier to TomoTherapy, Rotary Systems Incorporated, filed suit in Minnesota state court, Tenth Judicial District,Anoka County, against TomoTherapy alleging misappropriation of trade secrets. Rotary Systems alleges TomoTherapy possessed Rotary Systems'trade secrets pertaining to a component previously purchased from Rotary Systems, which component TomoTherapy now purchases from a differentsupplier. The suit alleges TomoTherapy improperly supplied the alleged trade secrets to its present supplier, Dynamic Sealing Technologies Inc. (also anamed defendant in the suit). TomoTherapy moved to dismiss the case in June 2011. Rotary Systems has made unspecified claim for damages ofgreater than $50,000. At this time, we do not have enough information to estimate what, if any, financial impact this claim will have. From time to time, the Company is involved in legal proceedings arising in the ordinary course of its business. Currently, except for the settlementwith Hi-Art previously discussed, management believes the Company does not have any probable and estimable loss related to any current legalproceedings and claims that would individually or in the aggregate materially adversely affect its financial condition or operating results. Litigation isinherently unpredictable and is subject to significant uncertainties, some of which are beyond the Company's control. Should any of these estimates andassumptions change or prove to have been incorrect, the Company could incur significant charges related to legal matters which could have a materialimpact on its results of operations, financial position and cash flows.125Table of ContentsAccuray IncorporatedNotes to Consolidated Financial Statements (Continued)9. Stockholders' Equity In August 2007, the Company announced that the Board of Directors had approved a stock repurchase plan that authorized the Company torepurchase shares of its common stock. Under the plan, the Company had the ability to acquire up to $25.0 million of common shares in the openmarket over a period of one year. No shares were repurchased during the years ended June 30, 2011 and 2010. As of June 30, 2011, the Company hadrepurchased 2,140,018 shares of its common stock for $24.0 million. Such shares were not retired nor returned to the status of authorized, unissuedshares. Accordingly, such shares remain issued and classified as treasury stock as of June 30, 2011. The Company accounts for its treasury stock underthe par value method. At June 30, 2011, the par value of the Company's treasury stock was immaterial. The stock repurchase plan expired in August2008 and was not renewed by the Board of Directors.Stock Options, Restricted Stock Units and Restricted Stock Awards At June 30, 2011, the Company had seven share-based compensation plans. Options may be granted to employees, directors and non-employeeconsultants to purchase shares of the Company's common stock. Additionally, the Company grants RSUs to employees that entitle the holder to receiveshares of common stock as the awards vest. Under the 2007 Plan, the Company may issue up to 9,000,000 shares, of which 3,600,095 were available for future issuances as of June 30, 2011.As of June 30, 2011, the 1993 Plan and the 1998 Plan continued to remain in effect along with the 2007 Plan; however, options can no longer begranted from the 1993 and 1998 Plans, and all options which expire or are forfeited will be retired from the pool. Only employees are eligible to receive incentive stock options. Non-employees may be granted non-qualified options. The Board of Directors hasthe authority to set the exercise price of all options granted, subject to the exercise price of incentive stock options being no less than 100% of the fairvalue of a share of common stock on the date of grant; and no less than 85% of the fair value for non-qualified stock options. Generally, the Company's outstanding options and RSUs vest at a rate of 25% per year. However, certain RSUs granted vest 10% upon the firstanniversary year of the grant date, 20% upon the second anniversary year of the grant date, 30% upon the third anniversary year of the grant date and40% upon the fourth anniversary year of the grant date. Continued vesting typically terminates when the employment or consulting relationship ends.The maximum term of the options granted to persons who own at least 10% of the voting rights of all outstanding stock on the date of grant is fiveyears. The maximum term of all other options is ten years. The Company's current practice with options is to issue new shares to satisfy share optionexercises. In connection with the Company's acquisition of TomoTherapy, the Company assumed 1,539,255 outstanding stock options and 429,591 RSAsunder TomoTherapy's stock plans. The remaining vesting term range, remaining contractual term range and exercise price range for the assumed stockoptions is 0 to 1.7 years, 0.4 to 4.4 years and $0.48 to $44.24, respectively, on an as converted basis. The remaining vesting term range for the RSAs is0.1 to 3.1 years. As of June 30, 2011, there was approximately $3.0 million of unrecognized compensation cost related to RSUs, which is expected to berecognized over a weighted average period of 2.3 years. As of June 30, 2011, there was approximately $6.8 million, net of estimated forfeitures, ofunrecognized126Table of ContentsAccuray IncorporatedNotes to Consolidated Financial Statements (Continued)9. Stockholders' Equity (Continued)compensation cost related to unvested stock options, which is expected to be recognized over a weighted average period of 2.6 years. As of June 30,2011, there was approximately $2.1 million of unrecognized compensation cost related to RSAs, which is expected to be recognized over a weighted-average period of 1.8 years. The Company uses the Black-Scholes option pricing model for determining the fair value of option grants. During the years ended June 30, 2011,2010 and 2009, the following weighted average assumptions were used: The following table summarizes the share-based compensation charges included in the Company's consolidated statements of operations (inthousands): During the years ended June 30, 2011 and 2009, the Company recognized $4.4 million and $0.9 million, respectively, of share-basedcompensation expense related to accelerated vesting of stock options, RSUs and RSAs in conjunction with employee separation costs. No suchexpenses were recognized during the year ended June 30, 2010. At June 30, 2011 and 2010, $0.3 million and $0.2 million, respectively, of capitalizedshare-based compensation costs were included as components of inventory and deferred cost of revenue. The aggregate intrinsic value in the table below represents the total pretax intrinsic value (the difference between the fair value of the Company'scommon stock on June 30, 2011 of $8.01 and the exercise price of the options) that would have been received by option holders if all optionsexercisable had been exercised on June 30, 2011. The total intrinsic value of options exercised in the years ended June 30, 2011, 2010, and 2009 wasapproximately $6.1 million, $6.6 million and $4.4 million, respectively. The total fair value of shares vested during the years ended June 30, 2011, 2010and 2009 was $3.4 million, $1.1 million and $1.1 million, respectively.127 Years Ended June 30, 2011 2010 2009Risk-free interest rate 1.88% - 2.44% 2.11% - 3.04% 1.66% - 3.59%Dividend yield — — —Expected life 6.25 6.25 6.25Expected volatility 52.8% - 54.9% 56.6% - 64.7% 61.2% - 68.5% Years Ended June 30, 2011 2010 2009 Cost of revenue $1,312 $1,721 $2,285 Selling and marketing 695 1,433 3,441 Research and development 2,922 2,850 3,190 General and administrative 8,436 4,642 6,545 $13,365 $10,646 $15,461 Table of ContentsAccuray IncorporatedNotes to Consolidated Financial Statements (Continued)9. Stockholders' Equity (Continued) Option activity during the year ended June 30, 2011 was as follows: During the years ended June 30, 2011, 2010 and 2009, the Company recognized $4.7 million, $6.6 million, and $10.3 million, respectively, ofshare-based compensation expense for stock options granted to employees. The weighted average fair value of options granted was $3.91, $3.45 and$4.01 per share for the years ended June 30, 2011, 2010, and 2009, respectively. Tax benefits from tax deductions for exercised options and disqualifying dispositions in excess of the deferred tax asset attributable to stockcompensation costs for such options are credited to additional paid-in capital. Realized excess tax benefits for the years ended June 30, 2011, 2010, and2009 were $0, $0.4 million and $0, respectively.128 OptionsOutstanding Weighted AverageExercise Price Weighted AverageRemainingContractual Life(In Years) AggregateIntrinsic Value Balance at June 30, 2010 7,808,591 $6.03 5.94 $16,651,240 Options granted 914,770 $7.30 Options exercised (1,396,685)$2.58 Options assumed 1,539,255 $10.41 Options forfeited (529,211)$8.60 Balance at June 30, 2011 8,336,720 $7.39 5.13 $19,131,104 Vested or Expected to vest at June 30,2011 8,326,649 $7.40 5.13 $19,118,440 Exercisable at June 30, 2011 6,426,627 $7.50 4.16 $16,537,781 Table of ContentsAccuray IncorporatedNotes to Consolidated Financial Statements (Continued)9. Stockholders' Equity (Continued) Combined activity under the 1993 Plan, 1998 Plan and 2007 Plan (the "Plans") was as follows: Under the 2007 Plan, the Company issued RSUs and recognized $2.9 million, $3.0 million and $4.1 million of share-based compensation expense,net of estimated forfeitures, for RSUs during the years ended June 30, 2011, 2010 and 2009, at a weighted average grant date fair value of $6.77, $6.12 SharesAvailableFor Grant Number ofOptionsOutstanding WeightedAverage ExercisePrice Number ofRSUsOutstanding WeightedAverage GrantDate FairValue Balance atJune 30,2008 2,226,181 9,212,831 $5.70 724,034 $23.43 Additionalsharesreserved 1,500,000 — $— — $— Expirations (415,686) — $— — $— Grants (1,759,969) 1,584,404 $6.55 175,565 $6.49 Forfeitures 1,095,231 (891,799)$11.94 (203,432)$22.36 Exercises orreleases — (1,450,120)$2.83 (176,558)$5.98 Balance atJune 30,2009 2,645,757 8,455,316 $5.70 519,609 $18.15 Additionalsharesreserved 1,500,000 — Expirations (325,120) — Grants (1,686,498) 1,498,740 $6.09 187,758 $6.12 Forfeitures 904,502 (831,716)$9.86 (72,786)$18.92 Exercises orreleases — (1,313,749)$1.55 (170,395)$6.32 Balance atJune 30,2010 3,038,641 7,808,591 $6.03 464,186 $12.52 Additionalsharesreserved 1,500,000 — — Expirations (151,042) — — Grants (1,389,949) 914,770 $7.30 475,179 $6.77 Optionsassumed — 1,539,255 $10.41 — $— Forfeitures 602,445 (529,211)$8.60 (79,180)$9.85 Exercises orreleases — (1,396,685)$2.58 (201,992)$7.57 Balance atJune 30,2011 3,600,095 8,336,720 $7.39 658,193 $6.97 and $6.49 per share, respectively. The activity under the RSA Plan was as follows:129 Number ofRSAsOutstanding WeightedAverage GrantDate FairValue Balance at June 30, 2010 — $— RSAs assumed 429,591 $7.39 Forfeitures — $— Releases (239,069)$7.39 Balance at June 30, 2011 190,522 $7.39 Table of ContentsAccuray IncorporatedNotes to Consolidated Financial Statements (Continued)9. Stockholders' Equity (Continued) The Company recognized $5.0 million of share-based compensation expense (which included $3.6 million of cash-based compensation) from theacquisition date through June 30, 2011 for RSAs assumed in connection with the acquisition of TomoTherapy.Employee Stock Purchase Plan Under the Company's 2007 Employee Stock Purchase Plan ("ESPP"), qualified employees are permitted to purchase the Company's commonstock at 85% of the lower of the fair market value of the common stock on the commencement date of each offering period or the fair market value onthe specified purchase date. The ESPP is deemed compensatory and compensation costs are accounted for under ASC 718, Stock Compensation. Themaximum number of shares authorized for sale under the ESPP is 2,698,002. Employees' payroll deductions may not exceed 10% of their salaries. Employees may purchase up to 2,500 shares per period provided that thevalue of the shares purchased in any calendar year may not exceed $25,000, as calculated pursuant to the purchase plan. The estimated fair value of ESPP shares was determined at the date of grant using the Black-Scholes option pricing model. Expected volatility wasbased on the historical volatility of a peer group of publicly traded companies. The expected term of six months was based upon the offering period ofthe ESPP. The risk-free rate for the expected term of the ESPP option was based on the U.S. Treasury Constant Maturity rate for each offering period.For the years ended June 30, 2011, 2010 and 2009, the Company recognized $0.8 million, $0.8 million and $1.0 million, respectively, of compensationexpense related to its ESPP, respectively. The weighted average assumptions were as follows: As of June 30, 2011, there was approximately $0.4 million of unrecognized compensation cost related to the ESPP, which is expected to berecognized over a weighted average period of 0.4 years. The weighted average fair value of ESPP shares was $2.03 and $2.21 per share for the yearsended June 30, 2011 and 2010, respectively. Pursuant to the terms of the Merger Agreement, the TomoTherapy ESPP was terminated upon closing of the transaction with the Company onJune 10, 2011. TomoTherapy made its last purchase on June 9, 2011 under the TomoTherapy ESPP and any remaining funds were refunded to theparticipants.130 Years Ended June 30, 2011 2010 2009Risk-free interest rate 0.11% - 0.23% 0.15% - 0.29% 0.29% - 1.99%Dividend yield — — —Expected life 0.50 0.50 0.50Expected volatility 33.6% - 56.7% 56.7% - 78.3% 66.4% - 85.4%Table of ContentsAccuray IncorporatedNotes to Consolidated Financial Statements (Continued)10. Income Taxes Income (loss) before provision for income taxes on the accompanying statements of operations included the following components (in thousands): The provision for (benefit from) income taxes consisted of the following (in thousands): A reconciliation of income taxes at the statutory federal income tax rate to net income taxes included in the accompanying consolidated statementsof operations is as follows (in thousands):131 Years Ended June 30, 2011 2010 2009 Domestic $(28,192)$1,169 $615 Foreign 2,626 1,668 49 Subtotal (25,566) 2,837 664 Minority interest (CPAC) (429) — — Total worldwide $(25,995)$2,837 $664 Years Ended June 30, 2011 2010 2009 Current: Federal $— $(876)$(164) State 114 265 41 Foreign 939 724 345 Total current 1,053 113 222 Deferred: Federal — — — State — — — Foreign 63 (117) (167) Total deferred 63 (117) (167) Total provision for (benefit from) income taxes $1,116 $(4)$55 Years Ended June 30, 2011 2010 2009 U.S. federal taxes (benefit): At federal statutory rate $(8,961)$993 $217 State tax, net of federal benefit 114 265 41 Stock-based compensation expense 33 389 682 Change in valuation allowance 8,883 (32) 45 Credits (1,373) (877) (1,207) Federal alternative minimum tax — (873) (164) Meals and entertainment 214 178 224 Acquisition costs 2,451 — — Other (251) (71) 39 Foreign 6 24 178 Total $1,116 $(4)$55 Table of ContentsAccuray IncorporatedNotes to Consolidated Financial Statements (Continued)10. Income Taxes (Continued) Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financialreporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets at June 30, 2011 and2010 were as follows (in thousands): The Company has not provided for U.S. income taxes on undistributed earnings of its foreign subsidiaries because it intends to permanently re-invest these earnings outside the U.S. The cumulative amount of such undistributed earnings upon which no U.S. income taxes have been provided asof June 30, 2011 was $3.0 million. As of June 30, 2011, the Company had approximately $116.1 million and $45.9 million in federal and state net operating loss carryforwards,respectively. Included in the federal and state net operating loss carryforwards is $72.0 million of federal net operating loss carryforwards and$18.0 million of state net operating loss carryforwards from the acquisition of TomoTherapy. The federal and state carryforwards expire in varyingamounts beginning in 2019 for federal and 2015 for state purposes. Such net operating loss carryforwards included excess tax benefits from employeestock option exercises which, in accordance with ASC 718-10, had not been recorded in the Company's deferred tax assets. The Company will recordapproximately $7.3 million as a credit to additional paid-in capital as and when such excess benefits are ultimately realized.132 June 30, 2011 2010 Deferred tax assets: Federal and state net operating losses $46,110 $10,127 Accrued vacation 2,184 1,019 Accrued bonus 2,315 — Deferred revenue 13,981 2,904 Deferred rent 1,355 362 Credits 12,500 6,692 Capitalized research and development 16 48 Stock-based compensation expense 15,007 9,008 Reserves not currently deductible for tax purposes 9,678 6,104 Fixed assets/intangibles — 389 Unicap 1,818 773 Other 1,626 513 Total deferred tax assets 106,590 37,939 Deferred tax liabilities: Fixed assets/intangibles (21,629) — Unrealized gain on investment/foreign currency differences (3,034) (15) Total deferred tax liabilities (24,663) (15)Valuation allowance (81,800) (37,734) Net deferred tax assets $127 $190 Table of ContentsAccuray IncorporatedNotes to Consolidated Financial Statements (Continued)10. Income Taxes (Continued) In addition, as of June 30, 2011, the Company had federal and state research and development tax credits of approximately $7.6 million and$7.5 million, respectively. The federal research credits will begin to expire in 2025 and the California research credits have no expiration date. Utilization of the Company's net operating loss and credit carryforwards is subject to annual limitation due to the ownership change limitationsprovided by Section 382 of the Internal Revenue Code and similar state provisions. However, none of the Company's federal and state carryforwardsare expected to expire as a result of the ownership change limitation. Based on the available objective evidence and history of losses, the Company has established a 100% valuation allowance against its domestic andcertain foreign net deferred tax assets due to the uncertainty surrounding the realization of such assets. The aggregate changes in the balance of gross unrecognized tax benefits were as follows at June 30, 2011, 2010, and 2009 (in thousands): The calculation of unrecognized tax benefits involves dealing with uncertainties in the application of complex global tax regulations. Managementregularly assesses the Company's tax positions in respect to legislative, bilateral tax treaty, regulatory and judicial developments in the countries inwhich the Company does business. The Company does not believe there will be any material changes in the unrecognized tax benefits within the next12 months. The Company has unrecognized tax positions of $11.2 million reserved for foreign tax issues which if recognized would impact the taxprovision in future years. The Company's continuing practice is to recognize interest and penalties related to income tax matters in income tax expense. Such interest andpenalties were immaterial for the years ended June 30, 2011, 2010 and 2009. The Company files income tax returns in the United States, various states and foreign jurisdictions. Due to attributes being carried forward andutilized during open years, the statute of limitations remains open for the U.S. federal jurisdiction and domestic states for tax years from 1999 andforward. The statute of limitations for Accuray France and Accuray Japan remain open from 2007 and 2010, respectively. For legacy TomoTherapyforeign entities, the statute of limitations in most foreign jurisdictions remain open from 2007. Currently, the Company is not under audit in any of its tax jurisdictions, both domestic and foreign.133 Years Ended June 30, 2011 2010 2009 Balance at beginning of year $3,669 $3,364 $1,380 Tax positions related to current year: Additions 10,468 347 551 Tax positions related to prior years: Additions 58 6 1,496 Reductions (37) (48) (63) Balance at end of year $14,158 $3,669 $3,364 Table of ContentsAccuray IncorporatedNotes to Consolidated Financial Statements (Continued)11. Other Income, Net For the years ended June 30, 2011, 2010 and 2009, other income, net consisted of the following (in thousands):12. Acquisition On June 10, 2011, the Company completed the acquisition of TomoTherapy by acquiring all of TomoTherapy's common stock in exchange forcash and shares of Accuray common stock. TomoTherapy is a creator of advanced radiation therapy solutions for cancer care. The objective of theacquisition is to create a company that can provide patients with radiation treatments tailored to their specific needs, from high-precision radiosurgery toimage-guided, intensity-modulated radiation therapy. The Company has included the financial results of TomoTherapy in its consolidated financialstatements from the date of acquisition. TomoTherapy's revenues from the acquisition date through June 30, 2011 were $11.1 million. The total purchase price for TomoTherapy was approximately $248.0 million and was comprised of the following (in thousands): The fair value of the Common Stock issued was based on the per share price of Accuray's Common Stock on the date of acquisition.134 Years Ended June 30, 2011 2010 2009 Interest income $543 $1,813 $3,866 Foreign currrency transaction gain 2,193 — 169 Realized gain on investments 27 318 — Other 69 270 95 Total interest and other income 2,832 2,401 4,130 Interest expense (23) (32) (10)Foreign currrency transaction loss — (1,920) — Loss on asset disposition (254) (195) (342)Realized loss on investments — — (288)State sales and local taxes (267) (226) (231)Fines and penalties — (27) (177) Total interest and other expense (544) (2,400) (1,048) Total other income, net $2,288 $1 $3,082 Cash $174,178 Common stock issued (9,112,511 shares) 67,341 Stock options assumed (1,539,255 shares) 2,234 RSAs assumed (429,591 shares) 4,270 $248,023 Table of ContentsAccuray IncorporatedNotes to Consolidated Financial Statements (Continued)12. Acquisition (Continued) The fair value of the stock options assumed was determined using the Black-Scholes option pricing model utilizing the following assumptions: The fair value of the stock options assumed was attributed to purchase price and post-transaction compensation expense based on the ratio of thepast service period to the total service period for each award. The value of the RSA's assumed was based on a combination of the per share price of Accuray's common stock on the date of acquisition and$3.15 for each pre-adjusted RSA. The fair value of the RSAs assumed was attributed to purchase price and post-transaction compensation expensebased on the ratio of the past service period to the total service period for each award. The preliminary allocation of the purchase price to TomoTherapy's tangible and identifiable intangible assets acquired and liabilities assumed wasbased on their estimated fair values at the date of acquisition as determined by the Company's management. The purchase price allocation has not beenfinalized since the Company has not had sufficient time to complete its analyses relating to certain accrued liabilities. Any adjustment that may resultfrom the finalization of the above analyses may be included in the final allocation of the purchase price of TomoTherapy, if the adjustment is determinedwithin the purchase price allocation period (up to twelve months from the closing date and deemed to have existed on the acquisition date). The excessof the purchase price over the tangible and identifiable intangible assets acquired and liabilities assumed has been allocated to goodwill. As of June 30,2011, the purchase price has been allocated as follows (in thousands): The Company has estimated the fair value of the acquired identifiable intangible assets, which are subject to amortization, using the incomeapproach, which included an analysis of the completion costs, cash flows, other required assets and risk associated with achieving such cash flows. Thegoodwill of $50.0 million represents the value that is expected from combining TomoTherapy with Accuray to135Risk Free Rate 0.10% - 1.36%Dividend Yield 0%Expected Life (in years) 0.44 - 4.44 Volatility 34% - 56%Cash $105,932 Accounts receivable 31,563 Inventories 72,383 Other assets 10,666 Property and equipment 28,878 Goodwill 49,979 Identified intangible assets 66,805 Accounts payable (14,974)Customer advances (13,045)Deferred revenue (39,856)Other liabilities (39,327)Noncontrolling interest (10,981) Total purchase price $248,023 Table of ContentsAccuray IncorporatedNotes to Consolidated Financial Statements (Continued)12. Acquisition (Continued)provide customers with a broader range of product offerings and generate greater opportunity for service revenue and for replacement business overtime to customers who have purchased these best-in-class technologies. No amount of goodwill is expected to be deductible for tax purposes. In conjunction with the acquisition, the Company recorded an expense of $10.5 million for severance payments to certain TomoTherapyemployees, most of which was paid as of June 30, 2011. These charges were recorded in operating expenses in the consolidated statements ofoperations for the year ended June 30, 2011. The Company incurred $18.5 million in acquisition-related costs for TomoTherapy during fiscal year2011, including the severance liability above, and additional acquisition-related costs, such as bankers' fees, legal and accounting fees and integrationcosts. The identifiable intangible assets assumed in the acquisition of TomoTherapy were recognized as follows based upon their fair values as ofJune 10, 2011 (in thousands): Acquired developed technology represents the fair value of TomoTherapy's products that have reached technological feasibility and are part of theexisting product line. Backlog represents existing production or sales orders not yet fulfilled as of June 10, 2011. In-process research and developmentrepresents TomoTherapy's research and development projects that had not reached technological feasibility and had no alternative future use whenacquired. The unaudited pro forma results presented below include the effects of pro forma adjustments as if TomoTherapy was acquired on July 1, 2009.The nonrecurring pro forma adjustments are primarily the result of fair value adjustments to intangible assets, inventory, fixed assets and deferredrevenue. The pro forma financial results do not include any anticipated synergies or other expected benefits of the acquisition. The table below ispresented for informational purposes only and is not indicative of future operations or results that would have been achieved had the acquisition beencompleted as of July 1, 2009 (in thousands, except per share amounts).136 Fair Value Useful Life (in years)Developed technology $41,645 6Backlog 10,500 1.25Distributor license 1,860 2.5 Total intangible assets subject to amortization 54,005 In-process research and development (CPAC) 12,800 Indefinite Total intangible assets $66,805 Years Ended June 30, 2011 2010 (unaudited) Net revenue $407,963 $409,313 Net loss attributable to stockholders $(74,522)$(50,037)Diluted earnings per share $(1.08)$(0.75)Table of ContentsAccuray IncorporatedNotes to Consolidated Financial Statements (Continued)13. Investment in CPAC During April 2008, TomoTherapy established a new affiliate, CPAC, to develop a compact proton therapy system for the treatment of cancer.CPAC's investors include TomoTherapy, private investors and potential customers. TomoTherapy contributed intellectual property with a fair market value of approximately $1.9 million as its investment in CPAC. CPAC raisedadditional capital of $6.6 million and $6.9 million during 2010 and 2009, respectively. As of June 30, 2011, the Company's ownership interest inCPAC was 5.5%. Although TomoTherapy's ownership in CPAC is less than 50%, it has consolidated CPAC, as TomoTherapy is the primarybeneficiary of CPAC due to its overall control of CPAC's activities and TomoTherapy's option to purchase a portion of the CPAC stock held by CPACinvestors in CPAC. CPAC's outside stockholders' interests are shown in the Company's consolidated financial statements as "Noncontrolling interests." In December, 2010, TomoTherapy and certain other CPAC investors purchased convertible promissory notes from CPAC. Under the terms of thenotes, TomoTherapy received 1,386,983 of CPAC's warrants. Total consideration for the notes TomoTherapy purchased was $0.8 million. Outsideinvestors purchased $0.8 million of the convertible promissory notes and received 1,386,981 of CPAC's warrants. The convertible promissory notes tooutside investors are included in "Other accrued liabilities" in the consolidated balance sheets. The notes bear interest at 12% and are convertible intoCPAC's common stock at a per share conversion price as defined in the notes. The CPAC warrants are exercisable through November 2020 at anexercise price of $0.57 per CPAC common share. At June 30, 2011, no notes had been converted and no warrants had been exercised. On March 9, 2011, TomoTherapy entered into a revolving promissory note with CPAC. On May 10, 2011, the revolving promissory note wasamended and $1.2 million was outstanding as of June 30, 2011. The remaining available amount of the revolving promissory note is $0.7 million. Therevolving promissory note bears interest at 12% per annum compounded quarterly. The revolving promissory note expires and all amounts become dueon the earlier of December 31, 2011, a transaction involving a change of control, or an event of default. TomoTherapy also has a contractual agreement to provide certain accounting and back office support and management services to CPAC.TomoTherapy may provide additional financial support to CPAC in the future. Settlements of CPAC's obligations are restricted to the assets of CPAC.The creditors and beneficial interest holders of CPAC have no contractual recourse to TomoTherapy or the Company.14. Related Party Transactions The Company's former Chief Executive Officer, Dr. John R. Adler, Jr. was a member of the Company's Board of Directors until his resignationeffective July 19, 2009, and is a member of the faculty at Stanford University, or Stanford, where he holds the position of Professor of Neurosurgeryand Radiation Oncology. Effective July 20, 2009, Dr. Adler was no longer considered a related party of the Company. The Company recognized related party revenue of $1.6 million during the year ended June 30, 2009 related to products and services provided toStanford. The Company recorded $0.2 million of expense during the year ended June 30, 2009 related to research grants with Stanford to supportcustomer studies related to the Company's CyberKnife Systems.137Table of ContentsAccuray IncorporatedNotes to Consolidated Financial Statements (Continued)14. Related Party Transactions (Continued) In April 2008, the Company entered into a consulting agreement with Dr. Adler, whereby Dr. Adler was entitled to receive a maximumcompensation of $167,100 per year, payable in quarterly installments at the beginning of each quarter beginning on April 1, 2008. In April 2009, the Company entered into a consulting agreement with Dr. Adler that terminated the prior consulting agreement discussed above.Under the new consulting agreement, Dr. Adler was entitled to receive maximum compensation of $168,100 per year, payable in quarterly installmentsat the beginning of each quarter beginning on April 1, 2009. This agreement had a term of one year however; Dr. Adler terminated this agreementeffective March 20, 2010. The Company recognized consulting expense for Dr. Adler in the amount of $167,000 for the year ended June 30, 2009.15. Employee Benefit Plans The Company's employee savings and retirement plan is qualified under Section 401(k) of the United States Internal Revenue Code. Employeesmay make voluntary, tax-deferred contributions to the 401(k) Plan up to the statutorily prescribed annual limit. The Company makes discretionarymatching contributions to the 401(k) Plan on behalf of employees up to the limit determined by the Board of Directors. The Company contributed$0.7 million, $0.7 million and $0.9 million to the 401(k) Plan during the years ended June 30, 2011, 2010 and 2009, respectively.16. Quarterly Financial Data (unaudited)138 Quarters ended September 30, 2010 December 31, 2010 March 31, 2011 June 30, 2011 (in thousands, except per share data) Net revenue $38,068 $54,246 $54,747 $75,223 Gross profit $18,237 $29,466 $27,313 $32,226 Net income (loss) $(4,640)$4,098 $(1,160)$(25,409)Basic net income (loss)per share $(0.08)$0.07 $(0.02)$(0.41)Diluted net income (loss)per share $(0.08)$0.07 $(0.02)$(0.41)Shares used in basic pershare calculation 58,667 59,282 59,960 62,451 Shares used in diluted pershare calculation 58,667 61,376 59,960 62,451 Table of ContentsAccuray IncorporatedNotes to Consolidated Financial Statements (Continued)16. Quarterly Financial Data (unaudited) (Continued) 17. Subsequent Events On August 1, 2011, the Company issued $100 million aggregate principal amount of 3.75% Convertible Senior Notes due 2016, (the "Notes") tocertain qualified institutional buyers (collectively, the "QIBs"). The Notes were offered and sold to the QIBs (the "Offering") pursuant to Rule 144Aunder the Securities Act of 1933, as amended. The Company received net proceeds of approximately $96.3 million from the Offering, after deductingthe initial purchaser's discount and commission and the estimated expenses of the Offering payable by the Company. The Notes will bear interest at arate of 3.75% per year, payable semi-annually in arrears in cash on February 1 and August 1 of each year, beginning on February 1, 2012. The Noteswill mature on August 1, 2016, unless earlier repurchased, redeemed or converted. On or after August 1, 2014 and prior to the maturity date, theCompany may redeem for cash all or a portion of the notes if the closing sale price of our common stock exceeds 130% of the conversion price ofapproximately $9.47 per share of common stock of such notes for at least 20 trading days during any consecutive 30 trading-day period (including thelast trading day of such period). On September 13, 2011, Accuray and certain other CPAC investors entered into a bridge loan with convertible promissory notes from CPAC.Accuray's portion was $175,000 and the other investors cumulative portion was an additional $175,000. The notes bear interest at 12% per annum andare due on December 31, 2011. In connection with the loan, the Company, as well as the other investors, received rights to warrants on terms similar tothe previous convertible promissory notes. On September 15, 2011, Radiation Stabilization Solutions, LLC filed a patent infringement complaint in the United States District Court for theNorthern District of Illinois, Eastern Division. The complaint, which has not yet been served on the Company, alleges the Company's sale of ourTomoHD product induces infringement of or contributorily infringes U.S. Patent No. 6,118,848, or the '848 Patent, and seeks unspecified monetarydamages for the alleged infringement. The complaint also names Varian Medical Systems, Inc., BrainLab AG, BrainLab, Inc., Elekta AB andElekta, Inc. as defendants, alleging that certain of their products also infringe the '848 patent. The Company is in the process of evaluating theallegations.139 Quarters ended September 30, 2009 December 31, 2009 March 31, 2010 June 30, 2010 (in thousands, except per share data) Net revenue $50,575 $57,321 $51,940 $61,789 Gross profit $21,619 $25,964 $25,376 $31,059 Net income (loss) $(3,276)$(1,176)$2,272 $5,021 Basic net income (loss)per share $(0.06)$(0.02)$0.04 $0.09 Diluted net income (loss)per share $(0.06)$(0.02)$0.04 $0.08 Shares used in basic pershare calculation 56,713 57,405 57,851 58,205 Shares used in diluted pershare calculation 56,713 57,405 60,470 60,564 Table of ContentsItem 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable.Item 9A. CONTROLS AND PROCEDURES (a) Evaluation of Disclosure Controls and Procedures Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design andoperation of our disclosure controls and procedures as of June 30, 2011. Based on this evaluation, our Chief Executive Officer and Chief FinancialOfficer concluded that as of the end of the period covered by our Annual Report on Form 10-K, in light of the material weakness in Internal Controlover Financial Reporting described below, our disclosure controls and procedures were not effective to provide reasonable assurance that theinformation required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized, and reportedwithin the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management,including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Notwithstanding the material weakness described below, we have performed additional analyses and other procedures to enable management toconclude that our consolidated financial statements included in this report were prepared in accordance with accounting principles generally accepted inthe United States of America.(b) Internal Control over Financial ReportingManagement's Annual Report Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) of the Exchange Act. Under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, managementconducted an evaluation of the effectiveness of our internal control over financial reporting based upon the framework in "Internal Control—IntegratedFramework" issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that our internal control over financial reporting was not effective as of June 30, 2011, basedupon the framework in "Internal Control—Integrated Framework". Management's assessment identified a material weakness in accounting forsignificant, non-routine transactions. Specifically, we did not have sufficient numbers of highly skilled accountants to provide for a timely analysis,documentation and review of the acquisition of TomoTherapy which closed on June 10, 2011. This material weakness prevented us from timelyreporting financial information for the year ended June 30, 2011. As allowed pursuant to guidance from the Securities and Exchange Commission (which states that management may omit an assessment of anacquired business' internal control over financial reporting from its assessment of internal control over financial reporting for a period not to exceed oneyear) we have excluded from our evaluation the internal control over the financial reporting of our wholly owned subsidiary TomoTherapy, which weacquired on June 10, 2011. From the acquisition date through June 30, 2011, net revenues of TomoTherapy represented five percent of our consolidatednet revenues. As of June 30, 2011, total assets and net tangible assets of TomoTherapy represented 65% of consolidated total assets and 39% ofconsolidated net tangible assets, respectively.140Table of Contents Grant Thornton LLP, an independent registered public accounting firm, has audited the consolidated financial statements included in this AnnualReport on Form 10-K and, as part of the audit, has issued a report, included herein, on the effectiveness of our internal control over financial reportingas of June 30, 2011.Management's Remediation Plan We plan to remediate our material weakness in accounting for significant, non-routine transactions by hiring additional highly skilled accountants.Changes in Internal Control over Financial Reporting Except as described above, during the fiscal quarter ended June 30, 2011, there was no change in our internal control over financial reporting thathas materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.Inherent Limitations of Internal Controls Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherentlimitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment andbreakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper managementoverride. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal controlover financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to designinto the process safeguards to reduce, though not eliminate, this risk.141Table of ContentsREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and StockholdersAccuray Incorporated We have audited Accuray Incorporated (a Delaware Corporation) and subsidiaries' (the "Company") internal control over financial reporting as ofJune 30, 2011, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of theTreadway Commission (COSO). The Company's management is responsible for maintaining effective internal control over financial reporting and forits assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Annual Report on InternalControl over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on ouraudit. Our audit of, and opinion on, the Company's internal control over financial reporting does not include internal control over financial reporting ofTomoTherapy Incorporated, a wholly owned subsidiary, whose financial statements reflect total assets and net revenues constituting 65% and 5%,respectively, of the related consolidated financial statement amounts as of and for the year ended June 30, 2011. As indicated in Management's Report,TomoTherapy Incorporated was acquired on June 10, 2011 and therefore, management's assertion on the effectiveness of the Company's internalcontrol over financial reporting excluded internal control over financial reporting of TomoTherapy Incorporated. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standardsrequire that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting wasmaintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that amaterial weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performingsuch other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company'sinternal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions arerecorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts andexpenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) providereasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have amaterial effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of anyevaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that thedegree of compliance with the policies or procedures may deteriorate. A material weakness is a deficiency, or combination of control deficiencies, in internal control over financial reporting, such that there is areasonable possibility that a material misstatement of the company's annual or interim financial statements will not be prevented or detected on a timelybasis. The following material weakness has been identified and included in management's assessment. The Company identified a material weakness inaccounting for significant, non-routine transactions.142Table of Contents In our opinion, because of the effect of the material weakness described above on the achievement of the objectives of the control criteria, AccurayIncorporated and subsidiaries have not maintained effective internal control over financial reporting as of June 30, 2011, based on criteria established inInternal Control—Integrated Framework issued by COSO. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the accompanyingconsolidated balance sheets of Accuray Incorporated and subsidiaries as of June 30, 2011 and 2010 and the related consolidated statements ofoperations, stockholders' equity, and cash flows for each of the three years in the period ended June 30, 2011. The material weakness identified abovewas considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2011 financial statements, and this report does notaffect our report dated September 19, 2011, which expressed an unqualified opinion on those financial statements./s/ GRANT THORNTON LLPSan Francisco, CaliforniaSeptember 19, 2011143Table of ContentsItem 9B. OTHER INFORMATION On April 14, 2011, we entered into an Amendment to Lease, or Lease Amendment, with OAW Orleans 1310, LLC, the successor company to TheRealty Associates Fund III, L.P., from whom we lease a manufacturing building, which is approximately 50,000 square feet, in Sunnyvale, California.The effective date of the Lease Amendment is April 12, 2011. Pursuant to the Lease Amendment, we exercised an option to extend the term of the lease,which had been set to expire on December 31, 2011, to December 31, 2015, and extended the lease by an additional three year extension term beyondthe option period, such that it expires on December 31, 2018. The Lease Amendment sets forth the monthly rent during the option period and additionalextension term, which ranges from $60,750 in calendar year 2012 to $72,539 in calendar year 2018. It also reflects a reduction in rent for the remainderof calendar year 2011, such that for February and March 2011, monthly rent was equal to $45,000, and for the remainder of calendar year 2011,monthly rent is free. The Lease Amendment also provides that the Company may request a further extension of the lease term for a five year term beginning January 1,2019 and expiring December 31, 2023, provided that the Company gives written notice of the exercise of such option at least 270 days, but not morethan 360 days, prior to the date that the option period would commence. The monthly base rent payable during the option term will be the market rate onthe date the option term commences, as determined in accordance with the Lease Amendment, in the landlord's good faith judgment. In addition, the Lease Amendment provides that the landlord is willing to approve the installation of additional radiation cells, on the terms andconditions set forth in the Lease Amendment. The foregoing descriptions are summaries and are therefore qualified in their entirety by reference to the complete text of the Lease Amendment,attached hereto as Exhibit 10.54.PART III Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE Directors, Executive Officers and Corporate Governance The information in our 2011 Proxy Statement regarding Directors and Executive officers appearing under the headings "Proposal One—Electionof Directors," "Executive Officers" and "Section 16(a) Beneficial Ownership Reporting Compliance" is incorporated herein by reference. In addition, the information in our 2011 Proxy Statement regarding the director nomination process, the Audit Committee financial expert and theidentification of the Audit Committee members appearing under the heading "Corporate Governance and Board of Directors Matters" is incorporatedherein by reference. There have been no material changes to the procedures by which stockholders may recommend nominees to our Board of Directors.Code of Conduct and Ethics We have adopted a Code of Conduct and Ethics that applies to all employees including our principal executive officer and principal financialofficer. The full texts of our codes of business conduct and ethics are posted on our website at www.accuray.com under the Investor Relations section.The inclusion of our web site address in this report does not include or incorporate by reference the information on our web site into this report.144Table of ContentsItem 11. EXECUTIVE COMPENSATION The information in our 2011 Proxy Statement appearing under the headings "Executive Compensation," "Compensation Committee Report,""Compensation Discussion and Analysis," "Compensation of Non-Employee Directors" and "Compensation Committee Interlocks and InsiderInformation" is incorporated herein by reference.Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATEDSTOCKHOLDER MATTERS The information in our 2011 Proxy Statement appearing under the heading "Security Ownership of Certain Beneficial Owners and Management"is incorporated herein by reference.Equity Compensation Plan Information The following table sets forth as of June 30, 2011 certain information regarding our equity compensation plans. All of our equity compensationplans have been approved by our security holders.Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE The information in our 2011 Proxy Statement appearing under the headings "Certain Relationships and Related Party Transactions" and"Corporate Governance—Director Independence" is incorporated herein by reference.Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The information in our 2011 Proxy Statement appearing under the headings "Proposal Five—Ratification of Appointment of IndependentRegistered Public Accounting Firm—Audit and Non-Audit Services" and "Proposal Five—Ratification of Appointment of Independent RegisteredPublic Accounting Firm—Audit Committee Pre-Approval Policies and Procedures" is incorporated herein by reference.145 A B C Plan category Number of securitiesto be issued uponexercise of outstandingoptions, warrants,and rights(1) Weighted-averageexercise price ofoutstanding options,warrants, and rights(2) Number of securitiesremaining available forfuture issuance underequity compensation plans(excluding securitiesreflectede in Column A) Equity compensationplans approved bysecurity holders 9,185,435 $7.39 3,600,095 Equity compensationplans not approved bysecurity holders — — — Total 9,185,435 $7.39 3,600,095 (1)Includes securities to be issued upon vesting of 658,193 restricted stock units at a weighted average grant date fair value of $6.97and 190,522 restricted stock awards at a weighted average grant date fair value of $7.39. (2)The weighted average exercise price does not take into account the shares issuable upon vesting of outstanding restricted stockunits and restricted stock awards, which have no exercise price.Table of ContentsPART IV Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) We have the filed the following documents as part of this report: 1. Consolidated Financial Statements (as set forth in Item 8) 2. Financial Statement ScheduleSCHEDULE IIValuation and Qualifying Accounts All other schedules have been omitted because they are not required, not applicable, or the required information is otherwise included.146Report of Independent Registered Public Accounting Firm 97 Consolidated Balance Sheets 98 Consolidated Statements of Operations 99 Consolidated Statements of Stockholders' Equity 100 Consolidated Statements of Cash Flows 101 Notes to Consolidated Financial Statements 102 BeginningBalance Additions(Deductions) Write-offs EndingBalance Accounts receivable Year ended June 30, 2009 $27 $496 $(39)$484 Year ended June 30, 2010 $484 $(358)$(11)$115 Year ended June 30, 2011 $115 $239 $(30)$324 BeginningBalance IncreaseDue toAcquisition Additions Deductions EndingBalance Accrued warranty Year ended June 30,2011 $— $7,600 $— $(805)$6,795 Table of Contents 3. Exhibits The following exhibits are incorporated by reference or filed herewith. Incorporated by Reference ExhibitNo. Exhibit Description Filer(ARAY/TOMO) Form File No. Exhibit Filing Date Furnishedor FiledHerewith 2.1 Agreement andPlan of Mergerof AccurayIncorporated, aDelawareCorporation,and AccurayIncorporated, aCaliforniaCorporation,dated as ofFebruary 3,2007. ARAY S-1/A 333-138622 2.1 02/07/2007 2.2 Agreement andPlan of Merger,dated March 6,2011, amongRegistrant,JaguarAcquisition, Inc.andTomoTherapyIncorporated. ARAY 8-K 001-33301 2.1 3/07/2011 3.1 Amended andRestatedCertificate ofIncorporation ofRegistrant. ARAY 10-Q 001-33301 3.1 11/08/2010 3.2 Amended andRestated Bylawsof Registrant. ARAY 8-K 001-33301 3.1 8/29/2011 4.2 Investors'RightsAgreementdatedOctober 30,2006 by andbetweenRegistrant andpurchasers ofSeries APreferred Stock,Series A1 ARAY S-1 333-138622 4.2 11/13/2006 147Preferred Stock,Series BPreferred Stockand Series CPreferred Stockand certainholders ofcommon stock. 4.3 Form ofCommon StockCertificate. ARAY S-1/A 333-138622 4.3 02/05/2007 Table of Contents Incorporated by Reference ExhibitNo. ExhibitDescription Filer(ARAY/TOMO) Form File No. Exhibit Filing Date Furnishedor FiledHerewith 10.1 IndustrialComplex Leasedated July 14,2003 by andbetweenRegistrant andMPCaribbean, Inc.,as amended bythe FirstAmendment toIndustrialComplex Leaseeffective as ofDecember 9,2004 and theSecondAmendment toIndustrialComplex Leaseeffective as ofSeptember 25,2006. ARAY S-1 333-138622 10.1 11/13/2006 10.1(a)ThirdAmendment toIndustrialComplex LeasedatedJanuary 16,2007. ARAY 10-K 001-33301 10.1(a) 09/04/2007 10.2 FourthAmendment toIndustrialComplexLease, datedSeptember 18,2007, by andbetween theRegistrant andBRCPCaribbeanPortfolio, LLC. ARAY 10-Q 001-33301 10.3 02/04/2010 10.3 FifthAmendment toIndustrialComplexLease, datedApril 1, 2008, ARAY 10-Q 001-33301 10.4 02/04/2010 148by and betweenthe Registrantand BRCPCaribbeanPortfolio, LLC. 10.4 SixthAmendment toIndustrialComplexLease, datedDecember 18,2009, by andbetween theRegistrant andI & GCaribbean, Inc. ARAY 10-Q 001-33301 10.5 02/04/2010 10.5 StandardIndustrial Leaseeffective as ofJune 30, 2005by and betweenRegistrant andThe RealtyAssociatesFund III, L.P. ARAY S-1 333-138622 10.2 11/13/2006 10.6*AccurayIncorporated1993 StockOption Planand forms ofagreementsrelating thereto. ARAY S-1 333-138622 10.3 11/13/2006 Table of Contents Incorporated by Reference ExhibitNo. Exhibit Description Filer(ARAY/TOMO) Form File No. Exhibit Filing Date Furnishedor FiledHerewith 10.7*AccurayIncorporated1998 EquityIncentive Planand forms ofagreementsrelating thereto. ARAY S-1 333-138622 10.4 11/13/2006 10.8*AccurayIncorporated2007 IncentiveAward Plan andforms ofagreementsrelating thereto. X 10.9*AccurayIncorporated2007 EmployeeStock PurchasePlan and formsof agreementsrelating thereto. ARAY S-1/A 333-138622 10.6 01/16/07 10.10*Form ofIndemnificationAgreement byand betweenRegistrant andeach of itsdirectors andexecutiveofficers. ARAY 10-Q 001-33301 10.7 05/10/11 10.11*Amended andRestatedEmploymentTerms LetterdatedFebruary 2,2011 by andbetweenRegistrant andEuan S.Thomson, Ph.D. ARAY 10-Q 001-33301 10.1 05/10/11 10.12*Amended andRestatedEmploymentTerms Letterdated ARAY 10-Q 001-33301 10.2 05/10/11 149February 2,2011 by andbetweenRegistrant andChris A.Raanes. 10.13*Amended andRestatedEmploymentTerms LetterdatedOctober 22,2008 by andbetweenRegistrant andEric Lindquist. ARAY 10-Q 001-33301 10.3 02/05/2009 10.14*EmploymentTerms Letterdated January 7,2011 by andbetweenRegistrant andEric Pauwels. ARAY 10-Q 001-33301 10.6 05/10/11 Table of Contents Incorporated by Reference ExhibitNo. Exhibit Description Filer(ARAY/TOMO) Form File No. Exhibit Filing Date Furnishedor FiledHerewith 10.15 Assignment &Assumption ofLicense andConsent bySupplier effectiveas of January 10,2005 by andamongRegistrant,AmericanScience andEngineering, Inc.,Yuri Batygin,and AnatoliyZapreier. ARAY S-1 333-138622 10.17 11/13/2006 10.16†NonexclusiveEnd-UserSoftware LicenseAgreement datedSeptember 9,2005 by andbetweenRegistrant andThe Regents ofthe University ofCalifornia. ARAY S-1 333-138622 10.18 11/13/2006 10.17†LicenseAgreementeffective as ofJuly 9, 1997 byand betweenRegistrant andThe Board ofTrustees of theLeland StanfordJuniorUniversity. ARAY S-1 333-138622 10.19 11/13/2006 10.18†Non-ExclusiveSystem PartnerAgreementeffective as ofSeptember 23,2005 by andbetweenRegistrant andKUKA RoboticsCorporation. ARAY S-1/A 333-138622 10.21 1/16/2007 150 10.19 Asset PurchaseAgreementeffective as ofDecember 12,2004 by andbetween theRegistrant andAmericanScience andEngineering, Inc. ARAY S-1/A 333-138622 10.45 12/22/2006 10.20†ExclusiveManufacturingAgreementeffective as ofNovember 29,2006 by andbetween theRegistrant andForte AutomationSystems, Inc. ARAY S-1/A 333-138622 10.46 01/16/2007 Table of Contents Incorporated by Reference ExhibitNo. Exhibit Description Filer(ARAY/TOMO) Form File No. Exhibit Filing Date Furnishedor FiledHerewith 10.21†Patent andTrademarkLicenseAgreementeffective as ofNovember 29,2006 by andbetween theRegistrant andForteAutomationSystems, Inc. ARAY S-1/A 333-138622 10.49 01/23/2007 10.22†License andDevelopmentAgreementdated April 27,2007 by andbetween theRegistrant andCyberHeart, Inc. ARAY 10-K 001-33301 10.51 08/31/2007 10.23†LicenseAgreementdatedDecember 10,2010 by andbetween theRegistrant andCyberHeart, Inc. ARAY 10-Q 001-33301 10.3 01/27/2011 10.24†Patent LicenseAgreementdatedDecember 10,2010 by andbetween theRegistrant andCyberHeart, Inc. ARAY 10-Q 001-33301 10.4 01/27/2011 10.25*Amended andRestatedEmploymentTerms Lettereffective as ofFebruary 2,2011 by andbetweenRegistrant andTheresaDadone. ARAY 10-Q 001-33301 10.5 05/10/11 151 10.26*Amended andRestatedEmploymentTerms LetterdatedFebruary 2,2011 by andbetweenRegistrant andDerek Bertocci. ARAY 10-Q 001-33301 10.2 05/10/11 10.27*General Releaseaned SeparationAgreement,dated October 1,2010, by andbetweenRegistrant andEric Lindquist. ARAY 10-Q 001-33301 10.1 1/27/2011 10.28*Amended andRestatedEmploymentLetterAgreementdatedFebruary 2,2011 by andbetweenRegistrant andDarren J.Milliken. ARAY 10-Q 001-33301 10.4 05/10/11 Table of Contents Incorporated by Reference ExhibitNo. Exhibit Description Filer(ARAY/TOMO) Form File No. Exhibit Filing Date Furnishedor FiledHerewith 10.29†Strategic AllianceAgreement, datedJune 8, 2010, byand between theRegistrant andSiemensAktiengesellschaft. ARAY 10-K 001-33301 10.30 09/01/2010 10.30†Multiple Linac andMulti-ModalityDistributorAgreement datedJune 8, 2010, byand between theRegistrant andSiemensAktiengesellschaft. ARAY 10-K 001-33301 10.31 09/01/2010 10.31*AccurayIncorporatedPerformanceBonus Plan. ARAY X 10.32 Lease Agreement,dated January 26,2005, by andbetweenTomoTherapyIncorporated andOld Sauk TrailsPark LimitedPartnership TOMO S-1 333-140600 10.13 2/12/2007 10.33 Lease Agreement,dated October 28,2005, betweenTomoTherapyIncorporated andAdelphia, LLC TOMO S-1 333-140600 10.14 2/12/2007 10.34 TomoTherapyIncorporated 2000Stock Option Plan,as amended, andforms of optionagreementsthereunder. ARAY S-8 333-174952 99.1 06/17/2011 10.35 TomoTherapyIncorporated 2002Stock Option Plan, ARAY S-8 333-174952 99.2 06/17/2011 152as amended, andforms of optionagreementsthereunder. 10.36 TomoTherapyIncorporated 2007Equity IncentivePlan, as amended,and forms ofoption agreementsthereunder. ARAY S-8 333-174952 99.3 06/17/2011 Table of Contents Incorporated by Reference ExhibitNo. ExhibitDescription Filer(ARAY/TOMO) Form File No. Exhibit Filing Date Furnishedor FiledHerewith 10.37 StockPurchaseAgreement,datedApril 25,2008,betweenCompactParticleAcclerationCorporationand itsinvestors TOMO 8-K 001-33452 10.1 4/28/08 10.38 ShareholderAgreement,datedApril 25,2008,betweenCompactParticleAccelerationCorporationand itsinvestors TOMO 8-K 001-33452 10.2 4/28/08 10.39 Investors'RightsAgreement,datedApril 25,2008,betweenCompactParticleAccelerationCorporationand itsinvestors TOMO 8-K 001-33452 10.3 4/28/08 10.40 LimitedExclusiveSublicenseAgreement,datedApril 25,2008,betweenTomoTherapyIncorporated TOMO 8-K 001-33452 10.6 4/28/08 153and CompactParticleAccelerationCorporation 10.41 Developmentand OEMSupplyAgreement,datedJanuary 27,2003, by andbetweenTomoTherapyIncorporatedand AnalogicCorporation TOMO S-1/A 333-140600 10.11 4/16/07 10.42 LicenseAgreement98-0228,datedFebruary 22,1999,betweenTomoTherapyIncorporatedandWisconsinAlumniResearchFoundation TOMO S-1/A 333-140600 10.4 4/19/07 10.43 Amendmentto LicenseAgreement90-0228,datedApril 16,2007,betweenTomoTherapyIncorporatedandWisconsinAlumniResearchFoundation TOMO S-1 333-146219 10.31 9/21/07 Table of Contents Incorporated by Reference ExhibitNo. ExhibitDescription Filer(ARAY/TOMO) Form File No. Exhibit Filing Date Furnishedor FiledHerewith 10.44 Amendmentto LicenseAgreement90-0228,datedDecember 16,2008,betweenTomoTherapyIncorporatedandWisconsinAlumniResearchFoundation TOMO 8-K 001-33452 10.2 12/30/08 10.45 LimitedExclusiveLicenseAgreement,datedFebruary 23,2007,betweenTomoTherapyIncorporatedand Regentsof theUniversity ofCalifornia TOMO 8-K 001-33452 10.4 4/28/08 10.46 AmendmentOne toLimitedExclusiveLicenseAgreement,dated April 8,2008,betweenTomoTherapyIncorporatedand LawrenceLivermoreNationalSecurity, LLC TOMO 8-K 001-33452 10.5 4/28/08 10.47 SupplyAgreement,dated June 25,2008, TOMO 8-K 001-33452 10.1 6/30/08 154betweenTomoTherapyIncorporatedand HitachiMedicalCorporation 10.48 Amendmentto SupplyAgreement,datedSeptember 10,2010,betweenTomoTherapyIncorporatedand HitachiMedicalCorporation TOMO 8-K 001-33452 10.1 9/10/10 10.49†Long-termPurchaseAgreement,datedDecember 22,2008, amongTomoTherapyIncorporated,e2v, Inc. ande2vTechnologies(UK) Limited TOMO 8-K 001-33452 10.1 12/30/08 Table of Contents Incorporated by Reference ExhibitNo. Exhibit Description Filer(ARAY/TOMO) Form File No. Exhibit Filing Date Furnishedor FiledHerewith 10.50†Manufacture andSupplyAgreement,datedJanuary 13, 2009and effectiveOctober 8, 2008,betweenTomoTherapyIncorporated andSiemens AGhealthcareSector,Components &VacuumTechnology TOMO 8-K 001-33452 10.1 1/16/09 10.51 Amendment Oneto Manufactureand SupplyAgreement,dated April 13,2009 andeffectiveOctober 8, 2008,betweenTomoTherapyIncorporated andSiemens AGhealthcareSector,Components &VacuumTechnology TOMO 8-K 001-33452 10.1 4/13/09 10.52†MagnetronSubscriptionAgreement,dated April 24,2009 andeffective May 1,2009, betweenTomoTherapyIncorporated ande2v, Inc. and e2vTechnologies(UK) Limited TOMO 8-K/A 001-33452 10.1 10/28/09 10.53 Amended andRestated EquityInterest Transfer TOMO 8-K 001-33452 2.1 11/23/09 155Agreement,datedNovember 18,2009, betweenTomoTherapyIncorporated andChengdu Twini-Peak AcceleratorTechnology Inc.,SichuanNanguangVacuumTechnologyIncorporated Ltd.And YaoChongguo 10.54 Amendment toLease, datedApril 12, 2011,betweenRegistrant andOAW Orleans1310, LLC, assuccessor to TheRealtyAssociates FundIII, L.P. XTable of Contents Incorporated by Reference ExhibitNo. ExhibitDescription Filer(ARAY/TOMO) Form File No. Exhibit Filing Date Furnishedor FiledHerewith 21.1 List ofsubsidiaries. X 23.1 Consent ofGrantThornton LLP,independentregisteredpublicaccountingfirm. X 24.1 Power ofAttorney(incorporatedby reference tothe signaturepage of thisannual reporton Form 10-K). X 31.1 Certification ofChiefExecutiveOfficerPursuant toSection 302 ofthe Sarbanes-Oxley Act of2002. X 31.2 Certification ofChiefFinancialOfficerPursuant toSection 302 ofthe Sarbanes-Oxley Act of2002. X 32.1 Certification ofChiefExecutiveOfficer andChiefFinancialOfficerPursuant to X156Section 906 ofthe Sarbanes-Oxley Act of2002. *Management contract or compensatory plan or arrangement. †Portions of the exhibit have been omitted pursuant to a request for confidential treatment, which has been granted. The omittedinformation has been filed separately with the Securities and Exchange Commission. The certification attached as Exhibit 32.1 that accompanies this Annual Report on Form 10-K is not deemed filed with the Securitiesand Exchange Commission and is not to be incorporated by reference into any filing of Accuray Incorporated under the Securities Act of1933 or the Securities Exchange Act of 1934, whether made before or after the date of this Annual Report on Form 10-K, irrespective ofany general incorporation language contained in such filing.Table of ContentsSIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned, thereunto duly authorized, in the City of Sunnyvale, State of California, on the 19th day of September 2011.POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each individual whose signature appears below constitutes and appoints Euan S.Thomson, Ph.D. and Derek Bertocci, and each of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution, for him andin his name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with allexhibits thereto and all other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact andagents, full power and authority to do and perform each and every act and thing requisite and necessary to be done therewith, as fully to all intents andpurposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, and any of them or his substituteor substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following and on the datesindicated.157 ACCURAY INCORPORATED By: /s/ EUAN S. THOMSON, PH.D.Euan S. Thomson, Ph.D.President and Chief Executive Officer By: /s/ DEREK BERTOCCIDerek BertocciSenior Vice President and Chief Financial OfficerSignature Title Date /s/ EUAN S. THOMSON, PH.D.Euan S. Thomson, PH.D. President and Chief Executive Officer andDirector (principal executive officer) September 19, 2011/s/ DEREK BERTOCCIDerek Bertocci Senior Vice President, Chief FinancialOfficer (principal financial and accountingofficer) September 19, 2011/s/ LOUIS J. LAVIGNE, JR.Louis J. Lavigne, Jr. Chairperson of the Board and Director September 19, 2011Table of Contents158Signature Title Date /s/ ELIZABETH DÁVILAElizabeth Dávila Vice Chairperson of the Board and Director September 19, 2011/s/ PETER FINEPeter Fine Director September 19, 2011/s/ JACK GOLDSTEIN, PH.D.Jack Goldstein, PH.D. Director September 19, 2011/s/ ROBERT S. WEISSRobert S. Weiss Director September 19, 2011/s/ DENNIS WINGERDennis Winger Director September 19, 2011/s/ WAYNE WUWayne Wu Director September 19, 2011Exhibit 10.8 2007 Incentive Award Plan 2007 INCENTIVE AWARD PLAN ARTICLE 1. PURPOSE The purpose of the Accuray Incorporated 2007 Incentive Award Plan (the “Plan”) is to promote the success and enhance the value of AccurayIncorporated by linking the personal interests of the members of the Board, Employees, and Consultants to those of Company stockholders and by providingsuch individuals with an incentive for outstanding performance to generate superior returns to Company stockholders. The Plan is further intended to provideflexibility to the Company in its ability to motivate, attract, and retain the services of members of the Board, Employees, and Consultants upon whosejudgment, interest, and special effort the successful conduct of the Company’s operation is largely dependent. ARTICLE 2. DEFINITIONS AND CONSTRUCTION Wherever the following terms are used in the Plan they shall have the meanings specified below, unless the context clearly indicates otherwise. Thesingular pronoun shall include the plural where the context so indicates. 2.1 “Award” means an Option, a Restricted Stock award, a Stock Appreciation Right award, a Performance Share award, a PerformanceStock Unit award, a Dividend Equivalents award, a Stock Payment award, a Deferred Stock award, a Restricted Stock Unit award, a Performance BonusAward, or a Performance-Based Award granted to a Participant pursuant to the Plan. 2.2 “Award Agreement” means any written agreement, contract, or other instrument or document evidencing an Award, including throughelectronic medium. 2.3 “Board” means the Board of Directors of the Company. 2.4 “Change in Control” means and includes each of the following: (a) A transaction or series of transactions (other than an offering of Stock to the general public through a registration statement filedwith the Securities and Exchange Commission) whereby any “person” or related “group” of “persons” (as such terms are used in Sections 13(d) and 14(d)(2)of the Exchange Act) (other than the Company, any of its subsidiaries, an employee benefit plan maintained by the Company or any of its subsidiaries or a“person” that, prior to such transaction, directly or indirectly controls, is controlled by, or is under common control with, the Company) directly or indirectlyacquires beneficial ownership (within the meaning of Rule 13d-3 under the Exchange Act) of securities of the Company 2007 INCENTIVE AWARD PLAN STD 7.1.11ACCURAY CONFIDENTIAL 1 possessing more than 50% of the total combined voting power of the Company’s securities outstanding immediately after such acquisition; or (b) During any period of two consecutive years, individuals who, at the beginning of such period, constitute the Board together withany new director(s) (other than a director designated by a person who shall have entered into an agreement with the Company to effect a transaction describedin Section 2.4(a) hereof or Section 2.4(c) hereof) whose election by the Board or nomination for election by the Company’s stockholders was approved by avote of at least two-thirds of the directors then still in office who either were directors at the beginning of the two-year period or whose election or nomination forelection was previously so approved, cease for any reason to constitute a majority thereof; or (c) The consummation by the Company (whether directly involving the Company or indirectly involving the Company through oneor more intermediaries) of (x) a merger, consolidation, reorganization, or business combination or (y) a sale or other disposition of all or substantially all of theCompany’s assets in any single transaction or series of related transactions or (z) the acquisition of assets or stock of another entity, in each case other than atransaction: (i) Which results in the Company’s voting securities outstanding immediately before the transaction continuing torepresent (either by remaining outstanding or by being converted into voting securities of the Company or the person that, as a result of the transaction,controls, directly or indirectly, the Company or owns, directly or indirectly, all or substantially all of the Company’s assets or otherwise succeeds to thebusiness of the Company (the Company or such person, the “Successor Entity”)) directly or indirectly, at least a majority of the combined voting power of theSuccessor Entity’s outstanding voting securities immediately after the transaction, and (ii) After which no person or group beneficially owns voting securities representing 50% or more of the combined votingpower of the Successor Entity; provided, however, that no person or group shall be treated for purposes of this Section 2.4(c)(ii) as beneficially owning 50%or more of combined voting power of the Successor Entity solely as a result of the voting power held in the Company prior to the consummation of thetransaction; or (d) The Company’s stockholders approve a liquidation or dissolution of the Company. 2.5 “Code” means the Internal Revenue Code of 1986, as amended. 2.6 “Committee” means the committee of the Board described in Article 12 hereof. 2.7 “Company” means Accuray Incorporated, a California corporation, or any successor corporation (including, without limitation, thesurviving corporation in any consolidation, merger or reincorporation effected exclusively to change the domicile of the Company). 2 2.8 “Consultant” means any consultant or adviser if: (a) the consultant or adviser renders bona fide services to the Company or anySubsidiary; (b) the services rendered by the consultant or adviser are not in connection with the offer or sale of securities in a capital-raising transaction anddo not directly or indirectly promote or maintain a market for the Company’s securities; and (c) the consultant or adviser is a natural person who hascontracted directly with the Company or any Subsidiary to render such services. 2.9 “Covered Employee” means an Employee who is, or could be, a “covered employee” within the meaning of Section 162(m) of the Code. 2.10 “Deferred Stock” means a right to receive a specified number of shares of Stock during specified time periods pursuant to Section 8.5hereof. 2.11 “Disability” means that the Participant qualifies to receive long-term disability payments under the Company’s long-term disabilityinsurance program, as it may be amended from time to time. 2.12 “Dividend Equivalents” means a right granted to a Participant pursuant to Section 8.3 hereof to receive the equivalent value (in cash orStock) of dividends paid on Stock. 2.13 “Effective Date” shall have the meaning set forth in Section 13.1 hereof. 2.14 “Eligible Individual” means any person who is an Employee, a Consultant or an Independent Director, as determined by the Committee. 2.15 “Employee” means any officer or other employee (as defined in accordance with Section 3401(c) of the Code) of the Company or anySubsidiary. 2.16 “Exchange Act” means the Securities Exchange Act of 1934, as amended. 2.17 “Fair Market Value” means, as of any given date, (a) if Stock is traded on an exchange, the closing price of a share of Stock as reported inthe Wall Street Journal (or such other source as the Company may deem reliable for such purposes) for such date, or if no sale occurred on such date, thefirst trading date immediately prior to such date during which a sale occurred; or (b) if Stock is not traded on an exchange but is quoted on a quotationsystem, the mean between the closing representative bid and asked prices for the Stock on such date, or if no sale occurred on such date, the first dateimmediately prior to such date on which sales prices or bid and asked prices, as applicable, are reported by such quotation system; or (c) if Stock is notpublicly traded, the fair market value established by the Committee acting in good faith. 2.18 “Incentive Stock Option” means an Option that is intended to meet the requirements of Section 422 of the Code or any successor provisionthereto. 2.19 “Independent Director” means a member of the Board who is not an Employee of the Company. 3 2.20 “Non-Employee Director” means a member of the Board who qualifies as a “Non-Employee Director” as defined in Rule 16b-3(b)(3) underthe Exchange Act, or any successor rule. 2.21 “Non-Qualified Stock Option” means an Option that is not intended to be an Incentive Stock Option. 2.22 “Option” means a right granted to a Participant pursuant to Article 5 hereof to purchase a specified number of shares of Stock at aspecified price during specified time periods. An Option may be either an Incentive Stock Option or a Non-Qualified Stock Option. 2.23 “Participant” means any Eligible Individual who, as a member of the Board, Consultant or Employee, has been granted an Awardpursuant to the Plan. 2.24 “Performance-Based Award” means an Award granted to selected Covered Employees pursuant to Section 8.7 hereof, but which is subjectto the terms and conditions set forth in Article 9 hereof. All Performance-Based Awards are intended to qualify as Qualified Performance-BasedCompensation. 2.25 “Performance Bonus Award” has the meaning set forth in Section 8.7 hereof. 2.26 “Performance Criteria” means the criteria that the Committee selects for purposes of establishing the Performance Goal or PerformanceGoals for a Participant for a Performance Period. The Performance Criteria that will be used to establish Performance Goals are limited to the following: netearnings (either before or after interest, taxes, depreciation and amortization), economic value-added, sales or revenue, net income (either before or after taxes),operating earnings, cash flow (including, but not limited to, operating cash flow and free cash flow), cash flow return on capital, return on net assets, returnon stockholders’ equity, return on assets, return on capital, stockholder returns, return on sales, gross or net profit margin, productivity, expense, margins,operating efficiency, customer satisfaction, working capital, earnings per share, price per share of Stock, and market share, any of which may be measuredeither in absolute terms or as compared to any incremental increase or as compared to results of a peer group. The Committee shall define in an objectivefashion the manner of calculating the Performance Criteria it selects to use for such Performance Period for such Participant. 2.27 “Performance Goals” means, for a Performance Period, the goals established in writing by the Committee for the Performance Period basedupon the Performance Criteria. Depending on the Performance Criteria used to establish such Performance Goals, the Performance Goals may be expressed interms of overall Company performance or the performance of a division, business unit, or an individual. The Committee, in its discretion, may, within thetime prescribed by Section 162(m) of the Code, adjust or modify the calculation of Performance Goals for such Performance Period in order to prevent thedilution or enlargement of the rights of Participants (a) in the event of, or in anticipation of, any unusual or extraordinary corporate item, transaction, event, ordevelopment, or (b) in recognition of, or in anticipation of, any other unusual or nonrecurring events affecting the Company, or the financial statements of 4 the Company, or in response to, or in anticipation of, changes in applicable laws, regulations, accounting principles, or business conditions. 2.28 “Performance Period” means the one or more periods of time, which may be of varying and overlapping durations, as the Committee mayselect, over which the attainment of one or more Performance Goals will be measured for the purpose of determining a Participant’s right to, and the paymentof, a Performance-Based Award. 2.29 “Performance Share” means a right granted to a Participant pursuant to Section 8.1 hereof, to receive Stock, the payment of which iscontingent upon achieving certain Performance Goals or other performance-based targets established by the Committee. 2.30 “Performance Stock Unit” means a right granted to a Participant pursuant to Section 8.2 hereof, to receive Stock, the payment of which iscontingent upon achieving certain Performance Goals or other performance-based targets established by the Committee. 2.31 “Plan” means this Accuray Incorporated 2007 Incentive Award Plan, as it may be amended from time to time. 2.32 “Public Trading Date” means the first date upon which Stock is listed (or approved for listing) upon notice of issuance on any securitiesexchange or designated (or approved for designation) upon notice of issuance as a national market security on an interdealer quotation system. 2.33 “Qualified Performance-Based Compensation” means any compensation that is intended to qualify as “qualified performance-basedcompensation” as described in Section 162(m)(4)(C) of the Code. 2.34 “Restricted Stock” means Stock awarded to a Participant pursuant to Article 6 hereof that is subject to certain restrictions and may besubject to risk of forfeiture. 2.35 “Restricted Stock Unit” means an Award granted pursuant to Section 8.6 hereof. 2.36 “Securities Act” shall mean the Securities Act of 1933, as amended. 2.37 “Stock” means the common stock of the Company, no par value per share. “Stock” shall also include (i) the common stock of thesurviving corporation in any consolidation, merger or reincorporation effected exclusively to change the domicile of the Company and (ii) such other securitiesof the Company that may be substituted for Stock pursuant to Article 11 hereof. 2.38 “Stock Appreciation Right” or “SAR” means a right granted pursuant to Article 7 hereof to receive a payment equal to the excess of the FairMarket Value of a specified number of shares of Stock on the date the SAR is exercised over the Fair Market Value on the date the SAR was granted as setforth in the applicable Award Agreement. 5 2.39 “Stock Payment” means (a) a payment in the form of shares of Stock, or (b) an option or other right to purchase shares of Stock, as partof any bonus, deferred compensation or other arrangement, made in lieu of all or any portion of the compensation, granted pursuant to Section 8.4 hereof. 2.40 “Subsidiary” means any “subsidiary corporation” as defined in Section 424(f) of the Code and any applicable regulations promulgatedthereunder or any other entity of which a majority of the outstanding voting stock or voting power is beneficially owned directly or indirectly by the Company. ARTICLE 3. SHARES SUBJECT TO THE PLAN 3.1 Number of Shares. (a) Subject to Article 11 hereof and Section 3.1(b) hereof, the aggregate number of shares of Stock which may be issued ortransferred pursuant to Awards under the Plan is 4,500,000. In addition to the foregoing, subject to Article 11 hereof, commencing on July 1, 2008 and on thefirst day of each fiscal year of the Company thereafter during the term of the Plan, the aggregate number of shares of Stock which may be issued or transferredpursuant to Awards under the Plan shall be increased by that number of shares of Stock equal to the least of (i) three percent (3%) of the Company’soutstanding shares on such date, (ii) 1,500,000 shares, or (iii) a lesser amount determined by the Board. (b) To the extent that an Award terminates, expires, or lapses for any reason, any shares of Stock subject to the Award shall again beavailable for the grant of an Award pursuant to the Plan. To the extent permitted by applicable law or any exchange rule, shares of Stock issued in assumptionof, or in substitution for, any outstanding awards of any entity acquired in any form of combination by the Company or any Subsidiary shall not be countedagainst shares of Stock available for grant pursuant to this Plan. To the extent that a SAR is exercised for or settled in Stock, only the actual number of sharesissued upon such exercise or settlement shall be counted for purposes of calculating the aggregate number of shares of Stock available for issuance under thePlan as set forth in Section 3.1(a). To the extent that a SAR is exercised for or settled in cash, no shares underlying such SAR shall be counted for purposes ofcalculating the aggregate number of shares of Stock available for issuance under the Plan as set forth in Section 3.1(a). The payment of Dividend Equivalentsin cash in conjunction with any outstanding Awards shall not be counted against the shares available for issuance under the Plan. Notwithstanding theprovisions of this Section 3.1(b), no shares of Stock may again be optioned, granted or awarded if such action would cause an Incentive Stock Option to failto qualify as an incentive stock option under Section 422 of the Code. 6 3.2 Stock Distributed. Any Stock distributed pursuant to an Award may consist, in whole or in part, of authorized and unissued Stock,treasury Stock or Stock purchased on the open market. 3.3 Limitation on Number of Shares Subject to Awards. Notwithstanding any provision in the Plan to the contrary, and subject to Article 11hereof, the maximum number of shares of Stock with respect to one or more Awards that may be granted to any one Participant during any calendar year shallbe 500,000 and the maximum amount that may be paid in cash during any calendar year with respect to any Performance-Based Award (including, withoutlimitation, any Performance Bonus Award) shall be $1,000,000; provided, however, that the foregoing limitations shall not apply prior to the Public TradingDate and, following the Public Trading Date, the foregoing limitations shall not apply until the earliest of: (a) the first material modification of the Plan(including any increase in the number of shares reserved for issuance under the Plan in accordance with Section 3.1 hereof); (b) the issuance of all of theshares of Stock reserved for issuance under the Plan; (c) the expiration of the Plan; (d) the first meeting of stockholders at which members of the Board are tobe elected that occurs after the close of the third calendar year following the calendar year in which occurred the first registration of an equity security of theCompany under Section 12 of the Exchange Act; or (e) such other date required by Section 162(m) of the Code and the rules and regulations promulgatedthereunder. ARTICLE 4. ELIGIBILITY AND PARTICIPATION 4.1 Eligibility. Each Eligible Individual shall be eligible to be granted one or more Awards pursuant to the Plan. 4.2 Participation. Subject to the provisions of the Plan, the Committee may, from time to time, select from among all Eligible Individuals,those to whom Awards shall be granted and shall determine the nature and amount of each Award. No Eligible Individual shall have any right to be granted anAward pursuant to this Plan. 4.3 Foreign Participants. Notwithstanding any provision of the Plan to the contrary, in order to comply with the laws in other countries inwhich the Company and its Subsidiaries operate or have Eligible Individuals, the Committee, in its sole discretion, shall have the power and authority to: (i)determine which Subsidiaries shall be covered by the Plan; (ii) determine which Eligible Individuals outside the United States are eligible to participate in thePlan; (iii) modify the terms and conditions of any Award granted to Eligible Individuals outside the United States to comply with applicable foreign laws; (iv)establish subplans and modify exercise procedures and other terms and procedures, to the extent such actions may be necessary or advisable (any suchsubplans and/or modifications shall be attached to this Plan as appendices); provided, however, that no such subplans and/or modifications shall increasethe share limitations contained in Sections 3.1 and 3.3 hereof; and (v) take any action, before or after an Award is made, that it deems advisable to obtainapproval or comply with any necessary local governmental regulatory exemptions or approvals. Notwithstanding the foregoing, the 7 Committee may not take any actions hereunder, and no Awards shall be granted, that would violate the Exchange Act, the Code, any securities law orgoverning statute or any other applicable law. ARTICLE 5. STOCK OPTIONS 5.1 General. The Committee is authorized to grant Options to Participants on the following terms and conditions: (a) Exercise Price. The exercise price per share of Stock subject to an Option shall be determined by the Committee and set forth inthe Award Agreement; provided, that, subject to Section 5.2(c) hereof, the per share exercise price for any Option shall not be less than 100% of the FairMarket Value of a share of Stock on the date of grant. (b) Time and Conditions of Exercise. The Committee shall determine the time or times at which an Option may be exercised in wholeor in part; provided that the term of any Option granted under the Plan shall not exceed ten years. The Committee shall also determine the performance orother conditions, if any, that must be satisfied before all or part of an Option may be exercised. (c) Payment. The Committee shall determine the methods by which the exercise price of an Option may be paid, the form ofpayment, including, without limitation: (i) cash, (ii) shares of Stock held for such period of time as may be required by the Committee in order to avoidadverse accounting consequences and having a fair market value on the date of delivery equal to the aggregate exercise price of the Option or exercised portionthereof, or (iii) other property acceptable to the Committee (including through the delivery of a notice that the Participant has placed a market sell order with abroker with respect to shares of Stock then issuable upon exercise of the Option, and that the broker has been directed to pay a sufficient portion of the netproceeds of the sale to the Company in satisfaction of the Option exercise price; provided that payment of such proceeds is then made to the Company uponsettlement of such sale), and the methods by which shares of Stock shall be delivered or deemed to be delivered to Participants. Notwithstanding any otherprovision of the Plan to the contrary, after the Public Trading Date, no Participant who is a member of the Board or an “executive officer” of the Companywithin the meaning of Section 13(k) of the Exchange Act shall be permitted to pay the exercise price of an Option, or continue any extension of credit withrespect to the exercise price of an Option with a loan from the Company or a loan arranged by the Company in violation of Section 13(k) of the Exchange Act. (d) Evidence of Grant. All Options shall be evidenced by an Award Agreement between the Company and the Participant. TheAward Agreement shall include such additional provisions as may be specified by the Committee. 8 5.2 Incentive Stock Options. Incentive Stock Options shall be granted only to Employees and the terms of any Incentive Stock Optionsgranted pursuant to the Plan, in addition to the requirements of Section 5.1 hereof, must comply with the provisions of this Section 5.2. (a) Expiration. Subject to Section 5.2(c) hereof, an Incentive Stock Option shall expire and may not be exercised to any extent byanyone after the first to occur of the following events: (i) Ten years from the date it is granted, unless an earlier time is set in the Award Agreement; (ii) Three months after the Participant’s termination of employment as an Employee other than by reason of theParticipant’s death or Disability; and (iii) One year after the date of the Participant’s termination of employment or service on account of Disability or death. Upon the Participant’s Disability or death, any Incentive Stock Options exercisable at the Participant’s Disability or death may be exercised by theParticipant’s legal representative or representatives, by the person or persons entitled to do so pursuant to the Participant’s last will and testament, or, if theParticipant fails to make testamentary disposition of such Incentive Stock Option or dies intestate, by the person or persons entitled to receive the IncentiveStock Option pursuant to the applicable laws of descent and distribution. (b) Dollar Limitation. The aggregate Fair Market Value (determined as of the time the Option is granted) of all shares of Stock withrespect to which Incentive Stock Options are first exercisable by a Participant in any calendar year may not exceed $100,000 or such other limitation asimposed by Section 422(d) of the Code, or any successor provision. To the extent that Incentive Stock Options are first exercisable by a Participant in excessof such limitation, the excess shall be considered Non-Qualified Stock Options. (c) Ten Percent Owners. An Incentive Stock Option may not be granted to any individual who, at the date of grant, owns stockpossessing more than ten percent of the total combined voting power of all classes of Stock of the Company unless such Option is granted at a price that is notless than 110% of Fair Market Value on the date of grant and the Option is exercisable for no more than five years from the date of grant. (d) Notice of Disposition. The Participant shall give the Company prompt notice of any disposition of shares of Stock acquired byexercise of an Incentive Stock Option within (i) two years from the date of grant of such Incentive Stock Option or (ii) one year after the transfer of such sharesof Stock to the Participant. (e) Right to Exercise. Except as set forth in Section 5.2(a)(iii) above, during a Participant’s lifetime, an Incentive Stock Option maybe exercised only by the Participant. 9 (f) Failure to Meet Requirements. Any Option (or portion thereof) purported to be an Incentive Stock Option, which, for any reason,fails to meet the requirements of Section 422 of the Code shall be considered a Non-Qualified Stock Option. ARTICLE 6. RESTRICTED STOCK AWARDS 6.1 Grant of Restricted Stock. The Committee is authorized to make Awards of Restricted Stock to any Participant selected by the Committeein such amounts and subject to such terms and conditions as determined by the Committee. All Awards of Restricted Stock shall be evidenced by an AwardAgreement. 6.2 Issuance and Restrictions. Restricted Stock shall be subject to such restrictions on transferability and other restrictions as the Committeemay impose (including, without limitation, limitations on the right to vote Restricted Stock or the right to receive dividends on the Restricted Stock). Theserestrictions may lapse separately or in combination at such times, pursuant to such circumstances, in such installments, or otherwise, as the Committeedetermines at the time of the grant of the Award or thereafter. 6.3 Forfeiture. Except as otherwise determined by the Committee at the time of the grant of the Award or thereafter, upon termination ofemployment or service during the applicable restriction period, Restricted Stock that is at that time subject to restrictions shall be forfeited; provided,however, that, the Committee may (a) provide in any Restricted Stock Award Agreement that restrictions or forfeiture conditions relating to Restricted Stockwill lapse in whole or in part in the event of terminations resulting from specified causes, and (b) provide in other cases for the lapse in whole or in part ofrestrictions or forfeiture conditions relating to Restricted Stock. 6.4 Certificates for Restricted Stock. Restricted Stock granted pursuant to the Plan may be evidenced in such manner as the Committee shalldetermine. If certificates representing shares of Restricted Stock are registered in the name of the Participant, certificates must bear an appropriate legendreferring to the terms, conditions, and restrictions applicable to such Restricted Stock, and the Company may, at its discretion, retain physical possession ofthe certificate until such time as all applicable restrictions lapse. ARTICLE 7. STOCK APPRECIATION RIGHTS 7.1 Grant of Stock Appreciation Rights. (a) A Stock Appreciation Right may be granted to any Participant selected by the Committee. A Stock Appreciation Right shall besubject to such terms and conditions not 10 inconsistent with the Plan as the Committee shall impose and shall be evidenced by an Award Agreement. (b) A Stock Appreciation Right shall entitle the Participant (or other person entitled to exercise the Stock Appreciation Right pursuantto the Plan) to exercise all or a specified portion of the Stock Appreciation Right (to the extent then exercisable pursuant to its terms) and to receive from theCompany an amount equal to the product of (i) the excess of (A) the Fair Market Value of the Stock on the date the Stock Appreciation Right is exercised over(B) the Fair Market Value of the Stock on the date the Stock Appreciation Right was granted and (ii) the number of shares of Stock with respect to which theStock Appreciation Right is exercised, subject to any limitations the Committee may impose. 7.2 Payment and Limitations on Exercise. (a) Subject to Section 7.2(b) below, payment of the amounts determined under Sections 7.1(b) above shall be in cash, in Stock(based on its Fair Market Value as of the date the Stock Appreciation Right is exercised) or a combination of both, as determined by the Committee in theAward Agreement. (b) To the extent any payment under Section 7.1(b) hereof is effected in Stock, it shall be made subject to satisfaction of allprovisions of Article 5 above pertaining to Options. ARTICLE 8. OTHER TYPES OF AWARDS 8.1 Performance Share Awards. Any Participant selected by the Committee may be granted one or more Performance Share awards whichshall be denominated in a number of shares of Stock and which may be linked to any one or more of the Performance Criteria or other specific performancecriteria determined appropriate by the Committee, in each case on a specified date or dates or over any period or periods determined by the Committee. Inmaking such determinations, the Committee shall consider (among such other factors as it deems relevant in light of the specific type of award) thecontributions, responsibilities and other compensation of the particular Participant. 8.2 Performance Stock Units. Any Participant selected by the Committee may be granted one or more Performance Stock Unit awards whichshall be denominated in unit equivalent of shares of Stock and/or units of value including dollar value of shares of Stock and which may be linked to any oneor more of the Performance Criteria or other specific performance criteria determined appropriate by the Committee, in each case on a specified date or dates orover any period or periods determined by the Committee. In making such determinations, the Committee shall consider (among such other factors as it deemsrelevant in light of the specific type of award) the contributions, responsibilities and other compensation of the particular Participant. 11 8.3 Dividend Equivalents. (a) Any Participant selected by the Committee may be granted Dividend Equivalents based on the dividends declared on the sharesof Stock that are subject to any Award, to be credited as of dividend payment dates, during the period between the date the Award is granted and the date theAward is exercised, vests or expires, as determined by the Committee. Such Dividend Equivalents shall be converted to cash or additional shares of Stock bysuch formula and at such time and subject to such limitations as may be determined by the Committee. (b) Dividend Equivalents granted with respect to Options or SARs that are intended to be Qualified Performance-BasedCompensation shall be payable, with respect to pre-exercise periods, regardless of whether such Option or SAR is subsequently exercised. 8.4 Stock Payments. Any Participant selected by the Committee may receive Stock Payments in the manner determined from time to time bythe Committee; provided, that unless otherwise determined by the Committee such Stock Payments shall be made in lieu of base salary, bonus, or other cashcompensation otherwise payable to such Participant. The number of shares shall be determined by the Committee and may be based upon the PerformanceCriteria or other specific performance criteria determined appropriate by the Committee, determined on the date such Stock Payment is made or on any datethereafter. 8.5 Deferred Stock. Any Participant selected by the Committee may be granted an award of Deferred Stock in the manner determined fromtime to time by the Committee. The number of shares of Deferred Stock shall be determined by the Committee and may be linked to the Performance Criteriaor other specific performance criteria determined to be appropriate by the Committee, in each case on a specified date or dates or over any period or periodsdetermined by the Committee. Stock underlying a Deferred Stock award will not be issued until the Deferred Stock award has vested, pursuant to a vestingschedule or performance criteria set by the Committee. Unless otherwise provided by the Committee, a Participant awarded Deferred Stock shall have norights as a Company stockholder with respect to such Deferred Stock until such time as the Deferred Stock Award has vested and the Stock underlying theDeferred Stock Award has been issued. 8.6 Restricted Stock Units. The Committee is authorized to make Awards of Restricted Stock Units to any Participant selected by theCommittee in such amounts and subject to such terms and conditions as determined by the Committee. At the time of grant, the Committee shall specify thedate or dates on which the Restricted Stock Units shall become fully vested and nonforfeitable, and may specify such conditions to vesting as it deemsappropriate. At the time of grant, the Committee shall specify the maturity date applicable to each grant of Restricted Stock Units which shall be no earlierthan the vesting date or dates of the Award and may be determined at the election of the grantee. On the maturity date, the Company shall, subject to Section10.5(b) hereof, transfer to the Participant one unrestricted, fully transferable share of Stock for each Restricted Stock Unit scheduled to be paid out on suchdate and not previously forfeited. 12 8.7 Performance Bonus Awards. Any Participant selected by the Committee may be granted a cash bonus (a “Performance Bonus Award”)payable upon the attainment of Performance Goals that are established by the Committee and relate to one or more of the Performance Criteria or other specificperformance criteria determined to be appropriate by the Committee, in each case on a specified date or dates or over any period or periods determined by theCommittee. Any such Performance Bonus Award paid to a Covered Employee may be a Performance-Based Award and be based upon objectivelydeterminable bonus formulas established in accordance with Article 9 hereof. 8.8 Term. Except as otherwise provided herein, the term of any Award of Performance Shares, Performance Stock Units, DividendEquivalents, Stock Payments, Deferred Stock or Restricted Stock Units shall be set by the Committee in its discretion. 8.9 Exercise or Purchase Price. The Committee may establish the exercise or purchase price, if any, of any Award of Performance Shares,Performance Stock Units, Deferred Stock, Stock Payments or Restricted Stock Units; provided, however, that such price shall not be less than the par valueof a share of Stock on the date of grant, unless otherwise permitted by applicable state law. 8.10 Exercise upon Termination of Employment or Service. An Award of Performance Shares, Performance Stock Units, DividendEquivalents, Deferred Stock, Stock Payments and Restricted Stock Units shall only be exercisable or payable while the Participant is an Employee,Consultant or a member of the Board, as applicable; provided, however, that the Committee in its sole and absolute discretion may provide that an Award ofPerformance Shares, Performance Stock Units, Dividend Equivalents, Stock Payments, Deferred Stock or Restricted Stock Units may be exercised or paidsubsequent to a termination of employment or service, as applicable, or following a Change in Control of the Company, or because of the Participant’sretirement, death or Disability, or otherwise; provided, however, that any such provision with respect to Performance Shares or Performance Stock Unitsshall be subject to the requirements of Section 162(m) of the Code that apply to Qualified Performance-Based Compensation. 8.11 Form of Payment. Payments with respect to any Awards granted under this Article 8 shall be made in cash, in Stock or a combination ofboth, as determined by the Committee. 8.12 Award Agreement. All Awards under this Article 8 shall be subject to such additional terms and conditions as determined by theCommittee and shall be evidenced by an Award Agreement. ARTICLE 9. PERFORMANCE-BASED AWARDS 9.1 Purpose. The purpose of this Article 9 is to provide the Committee the ability to qualify Awards other than Options and SARs and thatare granted pursuant to Articles 6 and 8 13 hereof as Qualified Performance-Based Compensation. If the Committee, in its discretion, decides to grant a Performance-Based Award to a CoveredEmployee, the provisions of this Article 9 shall control over any contrary provision contained in Articles 6 or 8 hereof; provided, however, that theCommittee may in its discretion grant Awards to Covered Employees that are based on Performance Criteria or Performance Goals but that do not satisfy therequirements of this Article 9. 9.2 Applicability. This Article 9 shall apply only to those Covered Employees selected by the Committee to receive Performance-BasedAwards. The designation of a Covered Employee as a Participant for a Performance Period shall not in any manner entitle the Participant to receive an Awardfor the period. Moreover, designation of a Covered Employee as a Participant for a particular Performance Period shall not require designation of such CoveredEmployee as a Participant in any subsequent Performance Period and designation of one Covered Employee as a Participant shall not require designation ofany other Covered Employees as a Participant in such period or in any other period. 9.3 Procedures with Respect to Performance-Based Awards. To the extent necessary to comply with the Qualified Performance-BasedCompensation requirements of Section 162(m)(4)(C) of the Code, with respect to any Award granted under Articles 6 or 8 hereof which may be granted to oneor more Covered Employees, no later than ninety (90) days following the commencement of any fiscal year in question or any other designated fiscal period orperiod of service (or such other time as may be required or permitted by Section 162(m) of the Code), the Committee shall, in writing, (a) designate one ormore Covered Employees, (b) select the Performance Criteria applicable to the Performance Period, (c) establish the Performance Goals, and amounts of suchAwards, as applicable, which may be earned for such Performance Period, and (d) specify the relationship between Performance Criteria and the PerformanceGoals and the amounts of such Awards, as applicable, to be earned by each Covered Employee for such Performance Period. Following the completion of eachPerformance Period, the Committee shall certify in writing whether the applicable Performance Goals have been achieved for such Performance Period. Indetermining the amount earned by a Covered Employee, the Committee shall have the right to reduce or eliminate (but not to increase) the amount payable at agiven level of performance to take into account additional factors that the Committee may deem relevant to the assessment of individual or corporateperformance for the Performance Period. 9.4 Payment of Performance-Based Awards. Unless otherwise provided in the applicable Award Agreement, a Participant must be employedby the Company or a Subsidiary on the day a Performance-Based Award for such Performance Period is paid to the Participant. Furthermore, a Participantshall be eligible to receive payment pursuant to a Performance-Based Award for a Performance Period only if the Performance Goals for such period areachieved. In determining the amount earned under a Performance-Based Award, the Committee may reduce or eliminate the amount of the Performance-BasedAward earned for the Performance Period, if in its sole and absolute discretion, such reduction or elimination is appropriate. 9.5 Additional Limitations. Notwithstanding any other provision of the Plan, any Award which is granted to a Covered Employee and isintended to constitute Qualified 14 Performance-Based Compensation shall be subject to any additional limitations set forth in Section 162(m) of the Code (including any amendment to Section162(m) of the Code) or any regulations or rulings issued thereunder that are requirements for qualification as qualified performance-based compensation asdescribed in Section 162(m)(4)(C) of the Code, and the Plan shall be deemed amended to the extent necessary to conform to such requirements. ARTICLE 10. PROVISIONS APPLICABLE TO AWARDS 10.1 Stand-Alone and Tandem Awards. Awards granted pursuant to the Plan may, in the discretion of the Committee, be granted either alone,in addition to, or in tandem with, any other Award granted pursuant to the Plan. Awards granted in addition to or in tandem with other Awards may be grantedeither at the same time as or at a different time from the grant of such other Awards. 10.2 Award Agreement. Awards under the Plan shall be evidenced by Award Agreements that set forth the terms, conditions and limitations foreach Award which may include the term of an Award, the provisions applicable in the event the Participant’s employment or service terminates, and theCompany’s authority to unilaterally or bilaterally amend, modify, suspend, cancel or rescind an Award. 10.3 Limits on Transfer. No right or interest of a Participant in any Award may be pledged, encumbered, or hypothecated to or in favor of anyparty other than the Company or a Subsidiary, or shall be subject to any lien, obligation, or liability of such Participant to any other party other than theCompany or a Subsidiary. Except as otherwise provided by the Committee, no Award shall be assigned, transferred, or otherwise disposed of by a Participantother than by will or the laws of descent and distribution. The Committee by express provision in the Award or an amendment thereto may permit an Award(other than an Incentive Stock Option) to be transferred to, exercised by and paid to certain persons or entities related to the Participant, including but notlimited to members of the Participant’s family, charitable institutions, or trusts or other entities whose beneficiaries or beneficial owners are members of theParticipant’s family and/or charitable institutions, or to such other persons or entities as may be expressly approved by the Committee, pursuant to suchconditions and procedures as the Committee may establish. Any permitted transfer shall be subject to the condition that the Committee receive evidencesatisfactory to it that the transfer is being made for estate and/or tax planning purposes (or to a “blind trust” in connection with the Participant’s termination ofemployment or service with the Company or a Subsidiary to assume a position with a governmental, charitable, educational or similar non-profit institution)and on a basis consistent with the Company’s lawful issue of securities. 10.4 Beneficiaries. Notwithstanding Section 10.3 hereof, a Participant may, in the manner determined by the Committee, designate abeneficiary to exercise the rights of the Participant and to receive any distribution with respect to any Award upon the Participant’s death. A beneficiary, legalguardian, legal representative, or other person claiming any rights 15 pursuant to the Plan is subject to all terms and conditions of the Plan and any Award Agreement applicable to the Participant, except to the extent the Plan andAward Agreement otherwise provide, and to any additional restrictions deemed necessary or appropriate by the Committee. If the Participant is married andresides in a community property state, a designation of a person other than the Participant’s spouse as his or her beneficiary with respect to more than 50% ofthe Participant’s interest in the Award shall not be effective without the prior written consent of the Participant’s spouse. If no beneficiary has been designatedor survives the Participant, payment shall be made to the person entitled thereto pursuant to the Participant’s will or the laws of descent and distribution. Subject to the foregoing, a beneficiary designation may be changed or revoked by a Participant at any time provided the change or revocation is filed with theCommittee. 10.5 Stock Certificates; Book Entry Procedures. (a) Notwithstanding anything herein to the contrary, the Company shall not be required to issue or deliver any certificates evidencingshares of Stock pursuant to the exercise of any Award, unless and until the Board has determined, with advice of counsel, that the issuance and delivery ofsuch certificates is in compliance with all applicable laws, regulations of governmental authorities and, if applicable, the requirements of any exchange onwhich the shares of Stock are listed or traded. All Stock certificates delivered pursuant to the Plan are subject to any stop-transfer orders and other restrictionsas the Committee deems necessary or advisable to comply with federal, state, or foreign jurisdiction, securities or other laws, rules and regulations and therules of any national securities exchange or automated quotation system on which the Stock is listed, quoted, or traded. The Committee may place legends onany Stock certificate to reference restrictions applicable to the Stock. In addition to the terms and conditions provided herein, the Board may require that aParticipant make such reasonable covenants, agreements, and representations as the Board, in its discretion, deems advisable in order to comply with anysuch laws, regulations, or requirements. The Committee shall have the right to require any Participant to comply with any timing or other restrictions withrespect to the settlement or exercise of any Award, including a window-period limitation, as may be imposed in the discretion of the Committee. (b) Notwithstanding any other provision of the Plan, unless otherwise determined by the Committee or required by any applicablelaw, rule or regulation, the Company shall not deliver to any Participant certificates evidencing shares of Stock issued in connection with any Award andinstead such shares of Stock shall be recorded in the books of the Company (or, as applicable, its transfer agent or stock plan administrator). 10.6 Paperless Exercise. In the event that the Company establishes, for itself or using the services of a third party, an automated system for theexercise of Awards, such as a system using an internet website or interactive voice response, then the paperless exercise of Awards by a Participant may bepermitted through the use of such an automated system. 16 10.7 Recoupment. (a) Recoupment in the Event of a Restatement of Financial Results. Notwithstanding anything to the contrary set forth in the Plan orany Award, effective July 1, 2010, in the event the Company is required to restate its financial results, the Board will review the conduct of executive officersin relation to the restatement. If the Board determines that an executive officer has engaged in misconduct, or otherwise violated the Company’s Code ofConduct and Ethics for Employees, Agents and Contractors, and that such misconduct or violation contributed to such restatement, then the Board may, inits discretion, take appropriate action to remedy the misconduct or violation, including, without limitation, seeking reimbursement of any portion of anyperformance-based or incentive compensation paid or awarded to the employee that is greater than would have been paid or awarded if calculated based on therestated financial results, to the extent not prohibited by governing law. For this purpose, the term “executive officer” means executive offers as defined by theSecurities Exchange Act of 1934, as amended. Any such action by the Board would be in addition to any other actions the Board of the Company may takeunder the Company’s policies, as modified from time to time, or any actions imposed by law enforcement, regulators or other authorities. (b) Recoupment in the Event of a Material Reduction in Publicly Disclosed Backlog. Notwithstanding anything to the contrary setforth in the Plan or any Award, effective July 1, 2011, in the event the Company is required to make a Material Reduction of its publicly-disclosed backlogfigures, the Board will review the conduct of executive officers in relation to the determination and publication of backlog figures and their subsequent MaterialReduction. If the Board determines that an executive officer has engaged in knowing or reckless misconduct, or otherwise violated the Company’s Code ofConduct and Ethics for Employees, Agents, and Contractors, and that such misconduct or violation led to the improper inclusion of a proposed system salein publicly-disclosed backlog, then the Board shall, in its discretion, take appropriate action to remedy the misconduct or violation, including, withoutlimitation, seeking reimbursement of any portion of any performance-based or incentive compensation paid or awarded to the executive officer that is greaterthan would have been paid or awarded if calculated based on the Materially Reduced backlog figures, to the extent not prohibited by governing law. For thispurpose, the term “executive officer” means executive offers as defined by the Securities Exchange Act of 1934, as amended. “Material Reduction” shall meana Reduction of at least 15% of the total backlog publicly reported by the Company in the preceding quarter. By “Reduction,” this provision is intended torelate to system sales which are included in publicly-disclosed backlog but are then removed due to the cancellation of the transaction. Removals from backlogdue to the fact that a system sale shipped and was recognized as revenue or where a system is removed from backlog due to it being in backlog longer than thetime provided for by the Company’s backlog criteria shall not count as a “Reduction.” Any action taken by the Board pursuant to this provision would be inaddition to any other actions the Board of the Company may take under the Company’s policies, as modified from time to time, or any actions imposed bylaw enforcement, regulators or other authorities. 17 ARTICLE 11. CHANGES IN CAPITAL STRUCTURE 11.1 Adjustments. (a) In the event of any stock dividend, stock split, combination or exchange of shares, merger, consolidation, spin-off,recapitalization or other distribution (other than normal cash dividends) of Company assets to stockholders, or any other change affecting the shares of Stockor the share price of the Stock, the Committee shall make proportionate adjustments to any or all of the following in order to reflect such change: (a) theaggregate number and kind of shares that may be issued under the Plan (including, but not limited to, adjustments of the limitations in Sections 3.1 and 3.3hereof); (b) the terms and conditions of any outstanding Awards (including, without limitation, any applicable performance targets or criteria with respectthereto); and (c) the grant or exercise price per share for any outstanding Awards under the Plan. Any adjustment affecting an Award intended as QualifiedPerformance-Based Compensation shall be made consistent with the requirements of Section 162(m) of the Code. (b) In the event of any transaction or event described in Section 11.1(a) hereof or any unusual or nonrecurring transactions or eventsaffecting the Company, any affiliate of the Company, or the financial statements of the Company or any affiliate, or of changes in applicable laws, regulationsor accounting principles, the Committee, in its sole and absolute discretion, and on such terms and conditions as it deems appropriate, either by the terms ofthe Award or by action taken prior to the occurrence of such transaction or event and either automatically or upon the Participant’s request, is herebyauthorized to take any one or more of the following actions in order to prevent dilution or enlargement of the benefits or potential benefits intended to be madeavailable under the Plan or with respect to any Award under the Plan, to facilitate such transactions or events or to give effect to such changes in laws,regulations or principles: (i) To provide for either (A) termination of any such Award in exchange for an amount of cash, if any, equal to the amountthat would have been attained upon the exercise of such Award or realization of the Participant’s rights (and, for the avoidance of doubt, if as of the date of theoccurrence of the transaction or event described in this Section 11.1 the Committee determines in good faith that no amount would have been attained upon theexercise of such Award or realization of the Participant’s rights, then such Award may be terminated by the Company without payment) or (B) the replacementof such Award with other rights or property selected by the Committee in its sole discretion; (ii) To provide that such Award be assumed by the successor or survivor corporation, or a parent or subsidiary thereof, orshall be substituted for by similar options, rights or awards covering the stock of the successor or survivor corporation, or a parent or subsidiary thereof,with appropriate adjustments as to the number and kind of shares and prices; (iii) To make adjustments in the number and type of shares of Stock (or other securities or property) subject to outstandingAwards, and in the number and kind of outstanding Restricted Stock or Deferred Stock and/or in the terms and conditions of (including 18 the grant or exercise price), and the criteria included in, outstanding options, rights and awards and options, rights and awards which may be granted in thefuture; (iv) To provide that such Award shall be exercisable or payable or fully vested with respect to all shares covered thereby,notwithstanding anything to the contrary in the Plan or the applicable Award Agreement; and (v) To provide that the Award cannot vest, be exercised or become payable after such event. 11.2 Acceleration Upon a Change in Control. Notwithstanding Section 11.1 hereof, and except as may otherwise be provided in any applicableAward Agreement or other written agreement entered into between the Company and a Participant, if a Change in Control occurs and a Participant’s Awards arenot converted, assumed, or replaced by a successor entity, then immediately prior to the Change in Control such Awards shall become fully exercisable and allforfeiture restrictions on such Awards shall lapse. Upon, or in anticipation of, a Change in Control, the Committee may cause any and all Awardsoutstanding hereunder to terminate at a specific time in the future, including but not limited to the date of such Change in Control, and shall give eachParticipant the right to exercise such Awards during a period of time as the Committee, in its sole and absolute discretion, shall determine. In the event that theterms of any agreement between the Company or any Company subsidiary or affiliate and a Participant contains provisions that conflict with and are morerestrictive than the provisions of this Section 11.2, this Section 11.2 shall prevail and control and the more restrictive terms of such agreement (and only suchterms) shall be of no force or effect. 11.3 No Other Rights. Except as expressly provided in the Plan, no Participant shall have any rights by reason of any subdivision orconsolidation of shares of stock of any class, the payment of any dividend, any increase or decrease in the number of shares of stock of any class or anydissolution, liquidation, merger, or consolidation of the Company or any other corporation. Except as expressly provided in the Plan or pursuant to action ofthe Committee under the Plan, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shallaffect, and no adjustment by reason thereof shall be made with respect to, the number of shares of Stock subject to an Award or the grant or exercise price ofany Award. ARTICLE 12. ADMINISTRATION 12.1 Committee. Unless and until the Board delegates administration of the Plan to a Committee as set forth below, the Plan shall beadministered by the full Board, and for such purposes the term “Committee” as used in this Plan shall be deemed to refer to the Board. The Board, at itsdiscretion or as otherwise necessary to comply with the requirements of Section 162(m) of the Code, Rule 16b-3 promulgated under the Exchange Act or to theextent required by any other applicable rule or regulation, shall delegate administration of the Plan to a 19 Committee. The Committee shall consist solely of two or more members of the Board each of whom is an “outside director,” within the meaning of Section162(m) of the Code, a Non-Employee Director and an “independent director” under the rules of The NASDAQ Global Market (or other principal securitiesmarket on which shares of Stock are traded), provided that any action taken by the Committee shall be valid and effective, whether or not members of theCommittee at the time of such action are later determined not to have satisfied the requirements for membership set forth in this Section 12.1 or otherwiseprovided in the charter of the Committee. Notwithstanding the foregoing: (a) the full Board, acting by a majority of its members in office, shall conduct thegeneral administration of the Plan with respect to all Awards granted to Independent Directors and for purposes of such Awards the term “Committee” as usedin this Plan shall be deemed to refer to the Board and (b) the Committee may delegate its authority hereunder to the extent permitted by Section 12.5 hereof. Inits sole discretion, the Board may at any time and from time to time exercise any and all rights and duties of the Committee under the Plan except with respectto matters which under Rule 16b-3 under the Exchange Act or Section 162(m) of the Code, or any regulations or rules issued thereunder, are required to bedetermined in the sole discretion of the Committee. The governance of the Committee shall be subject to the charter of the Committee as approved by theBoard. 12.2 Action by the Committee. Each member of the Committee is entitled to, in good faith, rely or act upon any report or other informationfurnished to that member by any officer or other employee of the Company or any Subsidiary, the Company’s independent certified public accountants, orany executive compensation consultant or other professional retained by the Company to assist in the administration of the Plan. 12.3 Authority of Committee. Subject to any specific designation in the Plan, the Committee has the exclusive power, authority and discretionto: (a) Designate Participants to receive Awards; (b) Determine the type or types of Awards to be granted to each Participant; (c) Determine the number of Awards to be granted and the number of shares of Stock to which an Award will relate; (d) Determine the terms and conditions of any Award granted pursuant to the Plan, including, but not limited to, the exercise price,grant price, or purchase price, any reload provision, any restrictions or limitations on the Award, any schedule for lapse of forfeiture restrictions or restrictionson the exercisability of an Award, and accelerations or waivers thereof, any provisions related to non-competition and recapture of gain on an Award, based ineach case on such considerations as the Committee in its sole discretion determines; provided, however, that the Committee shall not have the authority toaccelerate the vesting or waive the forfeiture of any Performance-Based Awards; 20 (e) Determine whether, to what extent, and pursuant to what circumstances an Award may be settled in, or the exercise price of anAward may be paid in, cash, Stock, other Awards, or other property, or an Award may be canceled, forfeited, or surrendered; (f) Prescribe the form of each Award Agreement, which need not be identical for each Participant; (g) Decide all other matters that must be determined in connection with an Award; (h) Establish, adopt, or revise any rules and regulations as it may deem necessary or advisable to administer the Plan; (i) Interpret the terms of, and any matter arising pursuant to, the Plan or any Award Agreement; and (j) Make all other decisions and determinations that may be required pursuant to the Plan or as the Committee deems necessary oradvisable to administer the Plan. 12.4 Decisions Binding. The Committee’s interpretation of the Plan, any Awards granted pursuant to the Plan, any Award Agreement and alldecisions and determinations by the Committee with respect to the Plan are final, binding, and conclusive on all parties. 12.5 Delegation of Authority. To the extent permitted by applicable law, the Committee may from time to time delegate to a committee of one ormore members of the Board or one or more officers of the Company the authority to grant or amend Awards to Participants other than (a) senior executives ofthe Company who are subject to Section 16 of the Exchange Act, (b) Covered Employees, or (c) officers of the Company (or members of the Board) to whomauthority to grant or amend Awards has been delegated hereunder. Any delegation hereunder shall be subject to the restrictions and limits that the Committeespecifies at the time of such delegation, and the Committee may at any time rescind the authority so delegated or appoint a new delegatee. At all times, thedelegatee appointed under this Section 12.5 shall serve in such capacity at the pleasure of the Committee. ARTICLE 13. EFFECTIVE AND EXPIRATION DATE 13.1 Effective Date. The Plan is effective as of the date the Plan is approved by the Company’s stockholders (the “Effective Date”). The Planwill be deemed to be approved by the stockholders if it receives the affirmative vote of the holders of a majority of the shares of stock of the Company inaccordance with applicable law and the applicable provisions of the Company’s bylaws. 13.2 Expiration Date. The Plan will expire on, and no Award may be granted pursuant to the Plan after, the tenth anniversary of the date thePlan is approved by the Board. Any 21 Awards that are outstanding on the tenth anniversary of the Effective Date shall remain in force according to the terms of the Plan and the applicable AwardAgreement. ARTICLE 14. AMENDMENT, MODIFICATION, AND TERMINATION 14.1 Amendment, Modification, and Termination. Subject to Section 15.14 hereof, with the approval of the Board, at any time and from timeto time, the Committee may terminate, amend or modify the Plan; provided, however, that (a) to the extent necessary and desirable to comply with anyapplicable law, regulation, or stock exchange rule, the Company shall obtain stockholder approval of any Plan amendment in such a manner and to such adegree as required, and (b) stockholder approval shall be required for any amendment to the Plan that (i) increases the number of shares available under thePlan (other than any adjustment as provided by Article 11 hereof), (ii) permits the Committee to grant Options with an exercise price that is below Fair MarketValue on the date of grant, or (iii) permits the Committee to extend the exercise period for an Option beyond ten years from the date of grant. Notwithstandingany provision in this Plan to the contrary, absent approval of the stockholders of the Company, no Option may be amended to reduce the per share exerciseprice of the shares subject to such Option below the per share exercise price as of the date the Option is granted and, except as permitted by Article 11 hereof,no Option may be granted in exchange for, or in connection with, the cancellation or surrender of an Option having a higher per share exercise price. 14.2 Awards Previously Granted. Except with respect to amendments made pursuant to Section 15.14 hereof, no termination, amendment, ormodification of the Plan shall adversely affect in any material way any Award previously granted pursuant to the Plan without the prior written consent of theParticipant. ARTICLE 15. GENERAL PROVISIONS 15.1 No Rights to Awards. No Eligible Individual or other person shall have any claim to be granted any Award pursuant to the Plan, andneither the Company nor the Committee is obligated to treat Eligible Individuals, Participants or any other persons uniformly. 15.2 No Stockholders Rights. Except as otherwise provided herein, a Participant shall have none of the rights of a stockholder with respect toshares of Stock covered by any Award until the Participant becomes the record owner of such shares of Stock. 15.3 Withholding. The Company or any Subsidiary shall have the authority and the right to deduct or withhold, or require a Participant toremit to the Company, an amount sufficient to satisfy federal, state, local and foreign taxes (including the Participant’s employment tax obligations) requiredby law to be withheld with respect to any taxable event concerning a Participant arising as a result of this Plan. The Committee may in its discretion and in 22 satisfaction of the foregoing requirement allow a Participant to elect to have the Company withhold shares of Stock otherwise issuable under an Award (orallow the return of shares of Stock) having a Fair Market Value equal to the sums required to be withheld. Notwithstanding any other provision of the Plan,the number of shares of Stock which may be withheld with respect to the issuance, vesting, exercise or payment of any Award (or which may be repurchasedfrom the Participant of such Award within six months (or such other period as may be determined by the Committee) after such shares of Stock were acquiredby the Participant from the Company) in order to satisfy the Participant’s federal, state, local and foreign income and payroll tax liabilities with respect to theissuance, vesting, exercise or payment of the Award shall be limited to the number of shares which have a Fair Market Value on the date of withholding orrepurchase equal to the aggregate amount of such liabilities based on the minimum statutory withholding rates for federal, state, local and foreign income taxand payroll tax purposes that are applicable to such supplemental taxable income. 15.4 No Right to Employment or Services. Nothing in the Plan or any Award Agreement shall interfere with or limit in any way the right of theCompany or any Subsidiary to terminate any Participant’s employment or services at any time, nor confer upon any Participant any right to continue in theemploy or service of the Company or any Subsidiary. 15.5 Unfunded Status of Awards. The Plan is intended to be an “unfunded” plan for incentive compensation. With respect to any paymentsnot yet made to a Participant pursuant to an Award, nothing contained in the Plan or any Award Agreement shall give the Participant any rights that are greaterthan those of a general creditor of the Company or any Subsidiary. 15.6 Indemnification. To the extent allowable pursuant to applicable law, each member of the Committee or of the Board shall be indemnifiedand held harmless by the Company from any loss, cost, liability, or expense that may be imposed upon or reasonably incurred by such member in connectionwith or resulting from any claim, action, suit, or proceeding to which he or she may be a party or in which he or she may be involved by reason of any actionor failure to act pursuant to the Plan and against and from any and all amounts paid by him or her in satisfaction of judgment in such action, suit, orproceeding against him or her; provided he or she gives the Company an opportunity, at its own expense, to handle and defend the same before he or sheundertakes to handle and defend it on his or her own behalf. The foregoing right of indemnification shall not be exclusive of any other rights ofindemnification to which such persons may be entitled pursuant to the Company’s Certificate of Incorporation or bylaws, as a matter of law, or otherwise, orany power that the Company may have to indemnify them or hold them harmless. 15.7 Relationship to Other Benefits. No payment pursuant to the Plan shall be taken into account in determining any benefits pursuant to anypension, retirement, savings, profit sharing, group insurance, welfare or other benefit plan of the Company or any Subsidiary except to the extent otherwiseexpressly provided in writing in such other plan or an agreement thereunder. 23 15.8 Expenses. The expenses of administering the Plan shall be borne by the Company and its Subsidiaries. 15.9 Titles and Headings. The titles and headings of the Sections in the Plan are for convenience of reference only and, in the event of anyconflict, the text of the Plan, rather than such titles or headings, shall control. 15.10 Fractional Shares. No fractional shares of Stock shall be issued and the Committee shall determine, in its discretion, whether cash shallbe given in lieu of fractional shares or whether such fractional shares shall be eliminated by rounding up or down as appropriate. 15.11 Limitations Applicable to Section 16 Persons. Notwithstanding any other provision of the Plan, the Plan, and any Award granted orawarded to any Participant who is then subject to Section 16 of the Exchange Act, shall be subject to any additional limitations set forth in any applicableexemptive rule under Section 16 of the Exchange Act (including any amendment to Rule 16b-3 under the Exchange Act) that are requirements for theapplication of such exemptive rule. To the extent permitted by applicable law, the Plan and Awards granted or awarded hereunder shall be deemed amended tothe extent necessary to conform to such applicable exemptive rule. 15.12 Government and Other Regulations. The obligation of the Company to make payment of awards in Stock or otherwise shall be subject toall applicable laws, rules, and regulations, and to such approvals by government agencies as may be required. The Company shall be under no obligation toregister pursuant to the Securities Act, as amended, any of the shares of Stock paid pursuant to the Plan. If the shares paid pursuant to the Plan may incertain circumstances be exempt from registration pursuant to the Securities Act, as amended, the Company may restrict the transfer of such shares in suchmanner as it deems advisable to ensure the availability of any such exemption. 15.13 Governing Law. The Plan and all Award Agreements shall be construed in accordance with and governed by the laws of the State ofCalifornia. 15.14 Section 409A. To the extent that the Committee determines that any Award granted under the Plan is subject to Section 409A of the Code,the Award Agreement evidencing such Award shall incorporate the terms and conditions required by Section 409A of the Code. To the extent applicable, thePlan and Award Agreements shall be interpreted in accordance with Section 409A of the Code and Department of Treasury regulations and other interpretiveguidance issued thereunder, including without limitation any such regulations or other guidance that may be issued after the Effective Date. Notwithstandingany provision of the Plan to the contrary, in the event that following the Effective Date the Committee determines that any Award may be subject to Section409A of the Code and related Department of Treasury guidance (including such Department of Treasury guidance as may be issued after the Effective Date),the Committee may adopt such amendments to the Plan and the applicable Award Agreement or adopt other policies and procedures (including amendments,policies and 24 procedures with retroactive effect), or take any other actions, that the Committee determines are necessary or appropriate to (a) exempt the Award from Section409A of the Code and/or preserve the intended tax treatment of the benefits provided with respect to the Award, or (b) comply with the requirements of Section409A of the Code and related Department of Treasury guidance. * * * * * I hereby certify that the foregoing Plan was duly adopted by the Board of Directors of Accuray Incorporated on January 15, 2007. * * * * * I hereby certify that the foregoing Plan was approved by the stockholders of Accuray Incorporated on January 31, 2007. * * * * * I hereby certify that Board of Directors of Accuray Incorporated amended the foregoing Plan to include Section 10.7 and such amendment was approved onAugust 24, 2010. * * * * * I hereby certify that Board of Directors of Accuray Incorporated amended the foregoing Plan to include Section 10.7(b) and such amendment was approved onJune 23, 2011. /s/ Darren J. MillikenCorporate Secretary – Darren J. Milliken 25Exhibit 10.31 Performance Bonus Plan Performance Bonus Plan As amended by the Board of Directors on June 23, 2011 1. Purposes of the Plan. The Plan is intended to increase stockholder value and the success of the Company by motivating key executives to:(1) perform to the best of their abilities, and (2) achieve the Company’s objectives. The Plan’s goals are to be achieved by providing such executives withincentive awards based on the achievement of goals relating to the performance of the Company or upon the achievement of objectively determinable individualperformance goals. The Plan is intended to permit the payment of bonuses that may qualify as performance-based compensation under Code section 162(m). 2. Definitions. (a) “Award” means, with respect to each Participant, the award determined pursuant to Section 8(a) below for a Performance Period. Each Award is determined by a Payout Formula for a Performance Period, subject to the Committee’s authority under Section 8(a) to eliminate or reduce theAward otherwise payable. (b) “Base Salary” means as to any Performance Period, the Participant’s annualized salary rate on the last day of the PerformancePeriod. Such Base Salary shall be before both (a) deductions for taxes or benefits, and (b) deferrals of compensation pursuant to Company-sponsored plans. (c) “Board” means the Board of Directors of the Company. (d) “Code” means the Internal Revenue Code of 1986, as amended. (e) “Committee” means the Compensation Committee of the Board. (f) “Company” means Accuray Incorporated or any of its subsidiaries (as such term is defined in Code Section 424(f)). (g) “Determination Date” means the latest possible date that will not jeopardize a Target Award or Award’s qualification asPerformance-Based Compensation. (h) “Fiscal Quarter” means a fiscal quarter of the Company. (i) “Fiscal Year” means a fiscal year of the Company. (j) “Maximum Award” means as to any Participant for any Performance Period, three million dollars. (k) “Participant” means an executive officer of the Company participating in the Plan for a Performance Period. FY11 EXEC PERFORMANCE BONUS PLANACCURAY CONFIDENTIAL 1 (l) “Payout Formula” means as to any Performance Period, the formula or payout matrix established by the Committee pursuant toSection 7 in order to determine the Awards (if any) to be paid to Participants. The formula or matrix may differ from Participant to Participant. (m) “Performance-Based Compensation” means compensation that is intended to qualify as “performance-based compensation”within the meaning of Section 162(m). (n) “Performance Goals” means the goal(s) (or combined goal(s)) determined by the Committee (in its discretion) to be applicable to aParticipant with respect to an Award. As determined by the Committee, the performance measures for any performance period will be any one or more of thefollowing objective performance criteria, applied to either the Company as a whole or, except with respect to stockholder return metrics, to a region, businessunit, affiliate or business segment, and measured either on an absolute basis or relative to a pre-established target, to a previous period’s results or to adesignated comparison group, and, with respect to financial metrics, which may be determined in accordance with United States Generally AcceptedAccounting Principles (“GAAP”), in accordance with accounting principles established by the International Accounting Standards Board (“IASB Principles”)or which may be adjusted when established to exclude any items otherwise includable under GAAP or under IASB Principles: (i) cash flow (includingoperating cash flow or free cash flow), (ii) revenue (on an absolute basis or adjusted for currency effects), (iii) gross margin, (iv) operating expenses oroperating expenses as a percentage of revenue, (v) earnings (which may include earnings before interest and taxes, earnings before taxes and net earnings), (vi)earnings per share, (vii) stock price, (viii) return on equity, (ix) total stockholder return, (x) growth in stockholder value relative to the moving average of theS&P 500 Index or another index, (xi) return on capital, (xii) return on assets or net assets, (xiii) return on investment, (xiv) economic value added, (xv)operating profit or net operating profit, (xvi) operating income, (xvii) operating margin, (xviii) market share, (xix) contract awards or backlog, (xx) overhead orother expense reduction, (xxi) credit rating, (xxii) objective customer indicators, (xxiii) new product invention or innovation, (xxiv) attainment of research anddevelopment milestones, (xxv) improvements in productivity, (xxvi) attainment of objective operating goals, (xxvii) contingent or non-contingent orders; and(xxviii) growth rates in any of the performance criteria listed in sections (i) through (xxvii) herein. (o) “Performance Period” means any Fiscal Quarter or Fiscal Year, or such other longer period, as determined by the Committee in itssole discretion. (p) “Plan” means this Performance Bonus Plan. (q) “Plan Year” means the Company’s fiscal year. (r) “Section 162(m)” means Section 162(m) of the Code, or any successor to Section 162(m), as that Section may be interpretedfrom time to time by the Internal Revenue Service, whether by regulation, notice or otherwise. (s) “Target Award” means the target award payable under the Plan to a Participant for the Performance Period, expressed as apercentage of his or her Base Salary or a specific dollar amount, as determined by the Committee in accordance with Section 6. 2 3. Plan Administration. (a) The Committee shall be responsible for the general administration and interpretation of the Plan and for carrying out itsprovisions. Subject to the requirements for qualifying compensation as Performance-Based Compensation, the Committee may delegate specificadministrative tasks to Company employees or others as appropriate for proper administration of the Plan. Subject to the limitations on Committee discretionimposed under Section 162(m) of the Code, the Committee shall have such powers as may be necessary to discharge its duties hereunder, including, but notby way of limitation, the following powers and duties, but subject to the terms of the Plan: (i) discretionary authority to construe and interpret the terms of the Plan, and to determine eligibility, Awards and theamount, manner and time of payment of any Awards hereunder; (ii) to prescribe forms and procedures for purposes of Plan participation and distribution of Awards; and (iii) to adopt rules, regulations and bylaws and to take such actions as it deems necessary or desirable for the properadministration of the Plan. (b) Any rule or decision by the Committee that is not inconsistent with the provisions of the Plan shall be conclusive and binding onall persons, and shall be given the maximum deference permitted by law. 4. Eligibility. The employees eligible to participate in the Plan for a given Performance Period shall be executive officers of the Company whoare designated by the Committee in its sole discretion. No person shall be automatically entitled to participate in the Plan. 5. Performance Goal Determination. The Committee, in its sole discretion, shall establish the Performance Goals for each Participant for thePerformance Period. Such Performance Goals shall be set forth in writing prior to the Determination Date. 6. Target Award Determination. The Committee, in its sole discretion, shall establish a Target Award for each Participant. EachParticipant’s Target Award shall be determined by the Committee in its sole discretion, and each Target Award shall be set forth in writing prior to theDetermination Date. 7. Determination of Payout Formula or Formulae. On or prior to the Determination Date, the Committee, in its sole discretion, shall establisha Payout Formula or Formulae for purposes of determining the Award (if any) payable to each Participant. Each Payout Formula shall (a) be set forth inwriting prior to the Determination Date, (b) be based on a comparison of actual performance to the Performance Goals, (c) provide for the payment of aParticipant’s Target Award if the Performance Goals for the Performance Period are achieved, and (d) provide for an Award greater than or less than theParticipant’s Target Award, depending upon the extent to which actual performance exceeds or falls 3 below the Performance Goals. Notwithstanding the preceding, in no event shall a Participant’s Award for any Performance Period exceed the Maximum Award. 8. Determination of Awards; Award Payment. (a) Determination and Certification. After the end of each Performance Period, the Committee shall certify in writing (which may beby approval of the minutes in which the certification was made) the extent to which the Performance Goals applicable to each Participant for the PerformancePeriod were achieved or exceeded. The Award for each Participant shall be determined by applying the Payout Formula to the level of actual performance thathas been certified by the Committee. Notwithstanding any contrary provision of the Plan, the Committee, in its sole discretion, may eliminate or reduce theAward payable to any Participant below that which otherwise would be payable under the Payout Formula but shall not have the right to increase the Awardabove that which would otherwise be payable under the Payout Formula. (b) Right to Receive Payment. Each Award under the Plan shall be paid solely from the general assets of the Company. Nothing inthis Plan shall be construed to create a trust or to establish or evidence any Participant’s claim of any right to payment of an Award other than as an unsecuredgeneral creditor with respect to any payment to which he or she may be entitled. A Participant needs to be employed by the Company through the payment datein order to be eligible to receive an Award payout hereunder. (c) Form of Distributions. The Company shall distribute all Awards to the Participant in cash. (d) Timing of Distributions. Subject to Section 8(e) below, the Company shall distribute amounts payable to Participants as soon asis practicable following the determination and written certification of the Award for a Performance Period. (e) Deferral. The Committee may defer payment of Awards, or any portion thereof, to Covered Employees as the Committee, in itsdiscretion, determines to be necessary or desirable to preserve the deductibility of such amounts under Section 162(m), but only in compliance with Section409A of the Code. In addition, the Committee, in its sole discretion, may permit a Participant to defer receipt of the payment of cash that would otherwise bedelivered to a Participant under the Plan. Any such deferral elections shall be subject to such rules and procedures as shall be determined by the Committee inits sole discretion and in compliance with Section 409A of the Code. (f) Recoupment. (i) Recoupment in the Event of a Restatement of Financial Results. Notwithstanding anything to the contrary set forth in the Plan orany Award, in the event of a restatement of incorrect financial results, the Board will review the conduct of executive officers inrelation to the restatement. If the Board determines that an executive officer has engaged in misconduct, or otherwise violated theCompany’s Code of Conduct and Ethics for Employees, Agents and Contractors, and that such misconduct or violationcontributed to such 4 restatement, then the Board may, in its discretion, take appropriate action to remedy the misconduct or violation, including,without limitation, seeking reimbursement of any portion of any performance-based or incentive compensation paid or awarded tothe employee that is greater than would have been paid or awarded if calculated based on the restated financial results, to the extentnot prohibited by governing law. For this purpose, the term “executive officer” means executive offers as defined by the SecuritiesExchange Act of 1934, as amended. Any such action by the Board would be in addition to any other actions the Board of theCompany may take under the Company’s policies, as modified from time to time, or any actions imposed by law enforcement,regulators or other authorities. If the Board takes any such action, Participants shall be required to reimburse the Company suchamounts as directed by the Board, in its sole discretion. (ii) Recoupment in the Event of a Material Reduction in Publicly Disclosed Backlog. Notwithstanding anything to the contrary setforth in the Plan or any Award, effective July 1, 2011, in the event the Company is required to make a Material Reduction of itspublicly-disclosed backlog figures, the Board will review the conduct of executive officers in relation to the determination andpublication of backlog figures and their subsequent Material Reduction. If the Board determines that an executive officer hasengaged in knowing or reckless misconduct, or otherwise violated the Company’s Code of Conduct and Ethics for Employees,Agents, and Contractors, and that such misconduct or violation led to the improper inclusion of a proposed system sale inpublicly-disclosed backlog, then the Board shall, in its discretion, take appropriate action to remedy the misconduct or violation,including, without limitation, seeking reimbursement of any portion of any performance-based or incentive compensation paid orawarded to the executive officer that is greater than would have been paid or awarded if calculated based on the Materially Reducedbacklog figures, to the extent not prohibited by governing law. For this purpose, the term “executive officer” means executiveoffers as defined by the Securities Exchange Act of 1934, as amended. “Material Reduction” shall mean a Reduction of at least15% of the total backlog publicly reported by the Company in the preceding quarter. By “Reduction,” this provision is intendedto relate to system sales which are included in publicly-disclosed backlog but are then removed due to the cancellation of thetransaction. Removals from backlog due to the fact that a system sale shipped and was recognized as revenue or where a systemis removed from backlog due to it being in backlog longer than the time provided for by the Company’s backlog criteria shall notcount as a “Reduction.” Any action taken by the Board pursuant to this provision would be in addition to any other actions theBoard may take under the Company’s policies, as modified from time to time, or any actions imposed by law enforcement,regulators or other authorities. If the Board takes any such action, Participants shall be required to reimburse the Company suchamounts as directed by the Board, in its sole discretion. 5 9. Term of Plan. Subject to its approval at the 2009 annual meeting of the Company’s stockholders, the Plan shall first apply to the 2011Plan Year. Once approved by the Company’s stockholders, the Plan shall continue until terminated under Section 10 of the Plan. 10. Amendment and Termination of the Plan. The Committee may amend, modify, suspend or terminate the Plan, in whole or in part, at anytime, including the adoption of amendments deemed necessary or desirable to correct any defect or to supply omitted data or to reconcile any inconsistency inthe Plan or in any Award granted hereunder; provided, however, that no amendment, alteration, suspension or discontinuation shall be made which would (i)impair any payments to Participants made prior to such amendment, modification, suspension or termination, unless the Committee has made a determinationthat such amendment or modification is in the best interests of all persons to whom Awards have theretofore been granted; provided further, however, that inno event may such an amendment or modification result in an increase in the amount of compensation payable pursuant to such Award or (ii) causecompensation that is, or may become, payable hereunder to fail to qualify as Performance-Based Compensation. To the extent necessary or advisable underapplicable law, including Section 162(m) of the Code, Plan amendments shall be subject to stockholder approval. At no time before the actual distribution offunds to Participants under the Plan shall any Participant accrue any vested interest or right whatsoever under the Plan except as otherwise stated in this Plan. 11. Withholding. Distributions pursuant to this Plan shall be subject to all applicable federal and state tax and withholding requirements. 12. At-Will Employment. No statement in this Plan should be construed to grant any employee an employment contract of fixed duration orany other contractual rights, nor should this Plan be interpreted as creating an implied or an expressed contract of employment or any other contractual rightsbetween the Company and its employees. The employment relationship between the Company and its employees is terminable at-will. This means that anemployee of the Company may terminate the employment relationship at any time and for any reason or no reason. 13. Successors. All obligations of the Company under the Plan, with respect to awards granted hereunder, shall be binding on any successorto the Company, whether the existence of such successor is the result of a direct or indirect purchase, merger, consolidation, or otherwise, of all orsubstantially all of the business or assets of the Company. 14. Indemnification. Each person who is or shall have been a member of the Committee, or of the Board, shall be indemnified and heldharmless by the Company against and from (a) any loss, cost, liability, or expense that may be imposed upon or reasonably incurred by him or her inconnection with or resulting from any claim, action, suit, or proceeding to which he or she may be a party or in which he or she may be involved by reason ofany action taken or failure to act under the Plan or any award, and (b) from any and all amounts paid by him or her in settlement thereof, with the Company’sapproval, or paid by him or her in satisfaction of any judgment in any such claim, action, suit, or proceeding against him or her, provided he or she shallgive the Company an opportunity, at its own expense, to handle and defend the same before he or she undertakes to handle and defend it on his or her ownbehalf. The foregoing right of indemnification shall not be exclusive of any other rights of indemnification to which 6 such persons may be entitled under the Company’s Certificate of Incorporation or Bylaws, by contract, as a matter of law, or otherwise, or under any powerthat the Company may have to indemnify them or hold them harmless. 15. Nonassignment. The rights of a Participant under this Plan shall not be assignable or transferable by the Participant except by will or thelaws of intestacy. 16. Governing Law. The Plan shall be governed by the laws of the State of California, without regard to conflicts of law provisionsthereunder. * * * * * I hereby certify that the foregoing Plan was duly adopted by the Board of Directors of Accuray Incorporated on September 24, 2009. * * * * * I hereby certify that the foregoing Plan was approved by the stockholders of Accuray Incorporated on November 20, 2009. * * * * * I hereby certify that Board of Directors of Accuray Incorporated amended the foregoing Plan to include Section 8(f) and such amendment was approved onAugust 24, 2010. * * * * * I hereby certify that Board of Directors of Accuray Incorporated amended the foregoing Plan to add Section 8(f)(ii) and such amendment was approved on June23, 2011. /s/ Darren J. MillikenCorporate Secretary – Darren J. Milliken 7Exhibit 10.54 AMENDMENT TO LEASE This Amendment to Lease (the “Amendment”) is dated as of April 12, 2011, for reference purposes only, and is made between OAW Orleans 1310,LLC, a Delaware limited liability company (“Landlord”) as successor to The Realty Associates Fund III, L.P., a Delaware limited partnership, and AccurayIncorporated, a California corporation (“Tenant”), with reference to the following facts and circumstances, which are conclusively agreed between the parties: A. Landlord and Tenant are parties to a lease dated for reference purposes as of June 30, 2005 (the “Lease”). Landlord has succeeded to theinterest of The Realty Associates Fund III, L.P., a Delaware limited partnership, and Tenant has attorned to and accepted OAW Orleans 1310, LLC,a Delaware limited liability company as the Landlord and owner of the Property. All capitalized words having an assigned meaning in the Lease shallcontinue to have such meaning in this Amendment unless explicitly modified. B. The Lease demises the real property located at and commonly known as 1306-1310 Orleans Drive, Sunnyvale, California (“Premises”),being approximately 50,000 square feet of space. C. The Lease currently expires on December 31, 2011. Tenant possesses an option to extend the Lease (“Option”) for the period from January1, 2012 to December 31, 2015 (the “Option Period”) pursuant to Exhibit F of the original Lease. D. Landlord and Tenant have discussed the Option, as well as the market rate for rent during the Option Period. It is their mutual intent torecognize that Tenant has exercised the Option and to document their agreement on a market rental rate for the Option Period. E. Landlord and Tenant have also discussed and agreed on a further period during which Tenant will lease the Premises pursuant to theLease as hereby amended, which will run from January 1, 2016 to December 31, 2018 (the “Extension Term”). F. In consideration of the foregoing, Landlord has agreed to modify Tenant’s Base Rent for the remaining period of the current Lease Termthrough December 31, 2011, and Landlord and Tenant are entering into other agreements modifying the Lease terms. G. Accordingly, Landlord and Tenant have agreed to enter into the following agreements and amendments to the Lease. Now, therefore, in consideration of all of the foregoing facts and circumstances, and for good and valuable consideration, the receipt of which isacknowledged by each party, Landlord and Tenant agree as follows: 1. Exercise of Option: Landlord and Tenant agree that Tenant has exercised the Option in the manner set forth in the Lease, Exhibit F, and within thetime window for exercise specified therein, and accordingly, that the Term of the Lease was thereby extended for the Option Period, that is, through December31, 2015. 2. Rent During Option Period: Landlord and Tenant agree that the parties have satisfied the requirements of negotiation set forth in Exhibit F to theoriginal Lease, and as a result, have agreed that the Base Rent for the Option Period shall be as follows: DatesPer SFMonthly 1/1/2012to12/31/2012$1.215$60,750.001/1/2013to12/31/2013$1.251$62,572.501/1/2014to12/31/2014$1.289$64,449.681/1/2015to12/31/2015$1.328$66,383.17 3. Rent Reduction During Remaining Term of Original Lease: Base Rent for the remaining current Lease Term shall be as set forth in thefollowing table: 1 DatesPer SFMonthly 2/1/2011to3/31/2011$0.900$45,000.004/1/2011to12/31/2011$0.000$0.00 Tenant shall continue to pay Tenant’s Percentage of Operating Expenses during the period of free Base Rent. 4. Extension of Lease: The Lease Term following exercise of the Option is hereby extended for an additional three (3) years (the “Extension Term”)which shall extend from the end of the Option Period, thus creating an additional term that runs from January 1, 2016 to December 31, 2018. 5. Rent During Extension Term: Base Rent during the Extension Term shall be as set forth in the following table: DatesPer SFMonthly 1/1/2016to12/31/2016$1.367$68,374.661/1/2017to12/31/2017$1.409$70,425.901/1/2018to12/31/2018$1.451$72,538.68 6. Option to Extend Term of Lease Beyond Extension Term: In place of the Option to Extend granted in Exhibit F to the Lease, Section 1, whichshall no longer be in effect, Landlord hereby grants to Tenant one further option to extend the Lease Term for one (1) “Further Extended Term” of five (5)years, beginning January 1, 2019 and extending to and including December 31, 2023, under the following terms and conditions: (a) On a date which is prior to the date that the option period would commence (if exercised) by at least two hundred seventy (270) days andnot more than three hundred sixty (360) days, Landlord shall have received from Tenant a written notice of the exercise of the option to extend the Lease forsaid additional term (an “Exercise Notice”), time being of the essence. If the Exercise Notice is not so given and received, the Extension Option shallautomatically expire, Tenant shall no longer have the right to give an Extension Notice and this section shall be of no further force or effect. Tenant shall givethe Exercise Notice using certified mail return receipt requested or some other method where the person delivering the package containing the Exercise Noticeobtains a signature of the person accepting the package containing the Exercise Notice (e.g., by FedEx with the requirement that the FedEx delivery personobtain a signature from the person accepting the package). (b) All of the terms and conditions of the Lease except where specifically modified by this section shall apply. (c) The monthly Base Rent payable during the option term shall be the Market Rate on the date the option term commences. (d) The term “Market Rate” shall mean the annual amount per rentable square foot that a willing, comparable renewal tenant would pay anda willing, comparable landlord of a similar building would accept at arm’s length for similar space, giving appropriate consideration to the following matters:(i) annual rental rates per rentable square foot; (ii) the type of escalation clauses (including, but without limitation, operating expense, real estate taxes, andCPI) and the extent of liability under the escalation clauses (i.e., whether determined on a “net lease” basis or by increases over a particular base year or basedollar amount); (iii) rent abatement provisions reflecting free rent and/or no rent during the lease term; (iv) length of lease term; (v) size and location ofpremises being leased; and (vi) other generally applicable terms and conditions of tenancy for similar space; provided, however, Tenant shall not be entitled toany tenant improvement or refurbishment allowance. Tenant shall not be entitled to any tenant improvement or refurbishment allowance, but such fact shallbe taken into account in reducing the effective rent payable by Tenant if such allowances are otherwise available in the market. In addition, in determining theMarket Rate, the existence of any specialized improvements paid for by Tenant, (including, without limitation, clean rooms) shall not be taken intoconsideration. The Market Rate may also designate periodic rental increases, a new Base Year and similar economic adjustments. (e) If Tenant exercises the Extension Option, Landlord shall determine the Market Rate by using its good faith judgment. Landlord shallprovide Tenant with written notice of such amount on or before the date that is ninety (90) days prior to the date that the term of the Extension Option willcommence. Tenant shall have fifteen (15) days (“Tenant’s Review Period”) after receipt of Landlord’s notice of the new rental within which to accept suchrental. In the event Tenant fails to accept in writing such rental proposal by Landlord, then such proposal shall be deemed rejected, and Landlord and Tenantshall attempt to agree upon such Market Rate, using their best good faith efforts. If Landlord and Tenant fail to reach agreement within fifteen (15) daysfollowing Tenant’s Review Period (“Outside Agreement Date”), then each party shall place in a separate sealed envelope their final proposal as to the MarketRate, and such determination shall be submitted to arbitration in accordance with subsections (i) through (v) below. (i) Landlord and Tenant shall meet with each other within five (5) business days after the Outside Agreement Date and exchangetheir sealed envelopes and then open such envelopes in each other’s presence. If Landlord and Tenant do not 2 mutually agree upon the Market Rate within one (1) business day of the exchange and opening of envelopes, then, within ten (10)business days of the exchange and opening of envelopes, Landlord and Tenant shall agree upon and jointly appoint a singlearbitrator who shall by profession be a real estate broker or agent who shall have been active over the five (5) year period endingon the date of such appointment in the leasing of buildings similar to the Premises in the geographical area of the Premises. Neither Landlord nor Tenant shall consult with such broker or agent as to his or her opinion as to the Market Rate prior to theappointment. The determination of the arbitrator shall be limited solely to the issue of whether Landlord’s or Tenant’s submittedMarket Rate for the Premises is the closest to the actual Market Rate for the Premises as determined by the arbitrator, taking intoaccount the requirements for determining Market Rate set forth herein. Such arbitrator may hold such hearings and require suchbriefs as the arbitrator, in his or her sole discretion, determines is necessary. In addition, Landlord or Tenant may submit to thearbitrator with a copy to the other party within five (5) business days after the appointment of the arbitrator any market data andadditional information such party deems relevant to the determination of the Market Rate (“MR Data”), and the other party maysubmit a reply in writing within five (5) business days after receipt of such MR Data. (ii) The arbitrator shall, within thirty (30) days of his or her appointment, reach a decision as to whether the parties shall useLandlord’s or Tenant’s submitted Market Rate and shall notify Landlord and Tenant of such determination. (iii) The decision of the arbitrator shall be final and binding upon Landlord and Tenant. (iv) If Landlord and Tenant fail to agree upon and appoint an arbitrator, then the appointment of the arbitrator shall be made by thepresiding judge of the Superior Court for the county in which the Premises is located, or, if he or she refuses to act, by any judgehaving jurisdiction over the parties. (v) The cost of the arbitration shall be paid by Landlord and Tenant equally. 7. Radiation Cells: Pursuant to Section 13.1(b) of the original Lease, Tenant has installed four Initial Radiation Cells, but has not installed the twoAdditional Radiation Cells referenced in Section 13.1(b). The following provision amends Section 13.1(b) as it relates to the potential installation of the twoAdditional Radiation Cells referred to in Section 13.1(b), and provides terms for Tenant to install “Further Additional Radiation Cells.” A. Tenant may install the two Additional Radiation Cells provided that (1) they are located in the shaded area on Exhibit A, which is attachedand incorporated in this Amendment; (2) the aggregate square footage of the two Additional Radiation Cells does not exceed 1800 square feet; and (3) tenantshall not be obligated to remove the two Additional Radiation Cells nor to restore the affected area as long as Tenant complies with (1) and (2) above. Section13.1 of the original Lease refers to the location of the Additional Radiation Cells by reference to a Space Plan attached to the Work Letter Agreement, but thisdesignation of location is superseded by the above agreement regarding location of the Additional Radiation Cells within the shaded area on Exhibit A. TheAdditional Radiation Cells shall continue to be subject to all other terms and provisions set forth in Section 13.1. B. Landlord is willing to approve installation of “Further Additional Radiation Cells” provided that they are located in the shaded area onExhibit A. If Tenant installs Further Additional Radiation Cells, then Tenant shall be responsible for removing the Further Additional Radiation Cells andrestoring of the area where the Further Additional Radiation Cells were located upon expiration of the Lease Term or any extension thereof. If Tenant elects not toremove the Further Additional Radiation Cells, Tenant shall pay to Landlord the incremental cost of removing the Further Additional Radiation Cells(“Landlord’s Additional Costs”), provided that Tenant has not become liable for removal costs of all Radiation Cells as a consequence of default and/or earlytermination of the Lease, as provided in Section 13.1. The Landlord’s Additional Costs shall be determined as follows: If Landlord elects to remove allRadiation Cells, Landlord shall obtain a minimum of two written bids from licensed general contractors for the total cost of removal of all Radiation Cells andrestoration of the affected space to its condition prior to Tenant’s construction. As a part of their bids, contractors shall state the amount of the constructioncost associated with removal and restoration of the area of the Further Additional Radiation Cells. Tenant shall pay landlord the incremental costs as estimatedby the lowest contractor’s bid for the Landlord Additional Costs. Notwithstanding the foregoing, Tenant shall only be liable to the Landlord for the Landlord’sAdditional Costs if the costs are actually incurred by Landlord and contractor actually performs the work. Tenant shall pay the Landlord’s Additional Coststo Landlord within ten (10) days of contractor completing work on the removal of the Further Additional Radiation Cells. Notwithstanding anything to thecontrary in the Lease, including Section 7 thereof, Landlord shall not be required to return Tenant’s unapplied Security Deposit funds unless and untilTenant’s account relating to removal and restoration incremental costs has been paid in full. Construction of Radiation Cells shall be subject to therequirements of Section 13.1(a) of the Lease applicable to Non-Permitted Improvements, save only that Landlord has hereby approved the construction ofRadiation Cells in principle and will exercise its right of approval and disapproval solely in regard to satisfying reasonable construction, insurance, andpermitting requirements related to the construction. Paragraph 7 of this Amendment shall survive the expiration or earlier termination of this Lease. C. 3 8. Continuing Obligation: Except as expressly set forth in this Amendment, all terms and conditions of the Lease remain in full force andeffect, and all terms and conditions of the Lease are incorporated herein as though set forth at length. However, any and all provisions set forth in theLease pursuant to which the Landlord was to construct any improvements to the Premises or to grant any free rent or rent concessions, are herebydeleted. Tenant agrees to accept the Premises “AS-IS”, with all faults as of the execution of this Amendment, as well as on the first day of the OptionTerm and the Extension Term 9. Effect of Amendment: This Amendment modifies the Lease. In the event of any conflict or discrepancy between the Lease and/or anyother previous documents between the parties and the provisions of this Amendment, then the provisions of this Amendment shall control. Except asmodified herein, the Lease shall remain in full force and effect. 10. Authority: Each individual executing this Amendment on behalf of Tenant represents and warrants that he or she is duly authorized toand does execute and deliver this Amendment pursuant to express authority from Tenant pursuant to and in accordance with the By-Laws and theother organic documents of the corporation. 11. Brokerage Commissions: Kidder Mathews has acted as real estate broker solely on behalf of Tenant. Landlord will pay KidderMathews a commission on this transaction pursuant to the separate written agreement between Landlord and said broker. Other than thisrelationship, neither party has been represented by a real estate broker in regard to the transaction represented by this Amendment, and no brokeragecommissions or finder’s fees are due in regard to the transaction. Tenant will hold Landlord harmless and indemnify Landlord against any claim,loss, or damage, including reasonable attorney’s fees, in regard to a brokerage commission or finder’s fee claim by a broker or finder under contractwith or working with Tenant. Landlord will hold Tenant harmless and indemnify Tenant against any claim, loss, or damage, including reasonableattorney’s fees, in regard to a brokerage commission or finder’s fee claim by a broker or finder under contract with or working with Landlord. 12. Entire Agreement: The Lease, as modified by this Amendment, constitutes and contains the entire agreement between the parties inregard to the real property leased pursuant to the Lease, and there are no binding agreements or representations between the parties except as expressedherein. Tenant acknowledges that neither Landlord nor Landlord’s Agents have made any legally binding representations or warranties as to anymatter except for such matters which are expressly set forth herein, including any representations or warranties relating to the condition of thePremises or the improvements thereto or the suitability of the Premises or the Project for Tenant’s business. LANDLORDTENANT OAW Orleans 1310, LLC, a Delaware limited liability companyAccuray Incorporated, a California corporation By:OAW Orleans, LLC, a Delaware limited liability companyBy:/s/ Alaleh Nouri By:OA Orleans Investor, LLC, a Delaware limited liabilitycompany, its Manager13 April 2011Alaleh Nouri, VP Associate General CounselBy:Orchard AEW Fund I, LLC, a Delaware limited liabilitycompany, its ManagerBy:/s/ Robert Ragusa By:Orchard A Investor, LLC, a California limited liabilitycompany, its Operating Member4/14/11Robert Ragusa, SVP Global Operations By:/s/ Michael J. BiggarDated: April 12, 2011Michael J. Biggar, Manager Dated:April 12, 2011 4QuickLinks -- Click here to rapidly navigate through this documentExhibit 21.1 Subsidiaries of the Registrant Name State or Jurisdiction ofOrganizationAccuray International SARL SwitzerlandAccuray Europe SAS FranceAccuray UK, Ltd. United KingdomAccuray Asia Ltd. Hong KongAccuray Japan K.K. JapanAccuray Spain, S.L.U. SpainAccuray Medical Equipment (India) Private Limited IndiaAccuray Medical Equipment (SEA) Private Limited SingaporeAccuray Medical Equipment (Rus) LLC. RussiaAccuray Medical Equipment GmbH GermanyAccuray Tibbi Cihazlar Ve Malzemeler Ithalat Ihracat Anonim Sirketi TurkeyAccuray Medical Equipment (Canada) Ltd. CanadaAccuray Mexico S.A. DE C.V. MexicoAccuray China (Wholly Foreign Owned Enterprise) ChinaAccuray Cayman Islands Cayman IslandsTomoTherapy Incorporated Wisconsin, USATomoTherapy Europe GmbH SwitzerlandChengdu Twin Peak Accelerator Incorporated (Wholly Foreign Owned Enterprise) ChinaTomoTherapy Asia Pacific Hong Kong Ltd Hong KongTomoTherapy UK, Ltd United KingdomTomoTherapy Belgium BVBA BelgiumTomoTherapy Italy Srl ItalyTomoTherapy Germany GmbH GermanyTomoTherapy France SARL FranceTomoTherapy Netherlands BV NetherlandsTomoTherapy Spain SpainQuickLinksExhibit 21.1Subsidiaries of the RegistrantQuickLinks -- Click here to rapidly navigate through this documentExhibit 23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We have issued our reports dated September 19, 2011, with respect to the consolidated financial statements, schedule, and internal control overfinancial reporting included in the Annual Report of Accuray Incorporated on Form 10-K for the year ended June 30, 2011. We hereby consent to theincorporation by reference of said reports in the Registration Statements of Accuray Incorporated on Form S-8 (File No. 333-174952, effective June 17,2011, 333-169139, effective September 1, 2010, File No. 333-166606, effective May 6, 2010, File No. 333-157120, effective February 5, 2009 andFile No. 333-141194, File No. 333-141195 and File No. 333-141197, effective March 9, 2007)./s/ GRANT THORNTON LLPSan Francisco, CaliforniaSeptember 19, 2011QuickLinksExhibit 23.1CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMQuickLinks -- Click here to rapidly navigate through this documentExhibit 31.1 Certifications I, Euan S. Thomson, Ph.D., certify that:1.I have reviewed this report on Form 10-K of Accuray Incorporated, a Delaware corporation; 2.Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary tomake the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the periodcovered by this report; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects,the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4.The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and15d-15(f)) for the registrant and have: a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which this report is being prepared; b)designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles; c)evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusion about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d)disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's mostrecent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonablylikely to materially affect, the registrant's internal control over financial reporting; and 5.The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, tothe registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internalcontrol over financial reporting.Date: September 19, 2011 /s/ EUAN S. THOMSON, PH.D.Euan S. Thomson, Ph.D.President and Chief Executive OfficerQuickLinksExhibit 31.1CertificationsQuickLinks -- Click here to rapidly navigate through this documentExhibit 31.2 I, Derek Bertocci, certify that:1.I have reviewed this report on Form 10-K of Accuray Incorporated, a Delaware corporation; 2.Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary tomake the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the periodcovered by this report; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects,the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4.The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and15d-15(f)) for the registrant and have: a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which this report is being prepared; b)designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles; c)evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusion about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d)disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's mostrecent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonablylikely to materially affect, the registrant's internal control over financial reporting; and 5.The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, tothe registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internalcontrol over financial reporting.Date: September 19, 2011 /s/ DEREK BERTOCCIDerek BertocciSenior Vice President and Chief Financial OfficerQuickLinksExhibit 31.2QuickLinks -- Click here to rapidly navigate through this documentExhibit 32.1 Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. § 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of Accuray Incorporated, aDelaware corporation (the "Company"), hereby certifies, to such officer's knowledge, that: (i) the accompanying Annual Report on Form 10-K of the Company for the twelve months ended June 30, 2011 (the "Report") fullycomplies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and (ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of theCompany.Date: September 19, 2011 /s/ EUAN S. THOMSON, PH.D.Euan S. Thomson, Ph.D.President and Chief Executive Officer /s/ DEREK BERTOCCIDerek BertocciSenior Vice President and Chief Financial OfficerQuickLinksExhibit 32.1Certification of Chief Executive Officer and Chief Financial Officer

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